This week's commentary is an interview with Gregory C. Walker, Chief Financial Officer & Senior Vice President of Finance of Magma Design Automation. Magma is the fourth largest EDA vendor with revenue of $114 million in its fiscal 2004 ending 3/31/04. Magma had revenue of $37 million in its last reported quarter. Like the previous
interview of George Janac, CEO and Founder of Silicon Navigator, the intent is to understand what it is like to be an executive in the EDA industry rather than query the interviewee concerning the company's financial performance, strategic direction or recent product
introductions. Overtime I intend to conduct interviews with a CTO, CIO and other executives (Any volunteers?).
Greg Walker joined Magma in 2002 as chief financial officer and vice president, finance. He gained significant experience in the EDA industry in six years at Synopsys, serving ultimately as vice president of finance. In his most recent experience prior to joining Magma he served as CFO, and later as interim CEO, for Accrue Software, a leading provider of customer relationship management products. He also served as CFO for Duet Technologies, as CFO for Netpower Inc., as treasurer and director of planning at Integrated Device Technology, as manager of corporate general accounting for IBM's ROLM division, and as manager of strategic planning and analysis for Xerox Corporation. Walker received
an M.B.A. from the University of Rochester in Rochester, New York, and a B.A. in economics and history from Union College in Schenectady, New York.
Define or describe the role of a Chief Financial Officer (CFO)
Within the EDA industry I think that much more than in many of the other industries that I have been involved in the CFO and his staff need to be a very outwardly faced organization within the company. And what I mean by that is rather than being inwardly faced and serving the audit and control role, it needs to play a very active role in the management of the company, in field with the deal flow and deal structures and also in how you put together development projects and funding activities. From what I have seen it's a much more focused and complex effort in EDA than I have seen in most of the other industries I have been involved in. We concentrate a lot on working out our
relationships with the sales force, the R&D team and the Application Engineering team to make sure that we can work well with them and be involved in the entire process within the company not just the back end financial flow.
What Departments does the CFO have responsibility for?
In my case and I think it's pretty typical I have all of Finance including planning, M&A, the legal organization, the IT organization, HR and Corporate Operations that includes quality management and quality assessment. They determine the ways that we are going to set up as performance metrics and measures and run the weekly operations review. R&D, S&M and Business Unit Managers do not report to me.
What is the relationship between the CFO and the CEO?
In our case it's a very close and advisory kind of role both with the CEO (Rajeev Madhavan) and with the President (Roy E. Jewell) of the company. With the CEO I'm involved very much in strategic discussions about where we want to be in 3-5 years and what are the types things we need to get there; how do we make that happen and all those kind of things. And then with Roy, the President, I spend a great deal of time working on how we grow the operations of the company in a reasonably efficient and effective way. And how do we scale as we go from being an early stage company a few years ago. So it is a very active and advisory role.
What is the relationship between the CFO and the Board of Directors?
In this environment it's got to be pretty close. We just went through a number of changes in the board within the last year. So we are still working on those relationships and mechanically on how we work together, and so forth. It is very important in the regulatory world that we are living in these days that the CFO and the board have a very good relationship and particularly the audit committee. We are very close. The person who chairs our audit committee, Kevin Eichler, is the CFO at MIPS. So he is an active CFO these days. We go through similar things. It is great to have another partner that I can turn too and say “How are you guys approaching this kind of problem?” He kind of
does the same thing with me. It's a growing tightness; it's a very, very close relationship we are trying to build as we move ahead with the new board.
What has been the impact of recent corporate governance legislation?
It has become an almost overwhelming requirement that I think is fairly well intentioned but probably poorly implemented at this stage, particularly for smaller companies. The burden placed on us and companies in our scale on the regulatory compliance across all corporate governance but particularly with Sarbanes/Oxley rules is very, very high and very expensive. When we look at that and at what it is costing us to get to where we need to be to pass our compliance test coming up in the end of the first half of calendar 2005, we are spending a tremendous amount of money. While they are good things to do, it's not probably the highest priority spending that we could be doing right now.
There is a very poor sense of proportion within the rule. I am looking at spending somewhere around $0.04 to $0.05 per share in additional compliance on top of our normal audit processes.
How is the strategic direction of the company set?
It is really set among the senior management team and then very much worked upon day to day by the CEO, President and myself. We meet obviously with people outside the company and with board members. But it is really the kind of situation where the CEO, CTO and SVP Engineering provide the technical vision and direction we are going and then myself and the President in conjunction with the CEO work on how we can actually make that happen. What can we do organically? What do we have to do through acquisition? As you well know EDA is a very acquisitive oriented industry. So we have to look what are the acquisitions we need in order to get to where we want to be, how we fund those, what is
the sequence in timing and working all that looking at the available candidates, on what kind of funding resources we need to have. So you have to be very intently involved in that. You have to be very open to financing techniques and very creative deal structuring.
How do you asses the value of a potential acquisition?
It is done in a number of ways simultaneously. You do some of the traditional discounted cash flow, return on investment analyses, you do the standard multiplier and comparisons of recent deals analysis that you do with bankers. You look at what is the value as a percentage of your total enterprise that you are willing to attribute to make the acquisition happen. And you look at how competitive the bidding is on a particular deal. You go through all of those different analyses and try to focus on an agreed upon value at the senior management level and board level. And then you go try to make that deal happen based upon that evaluation.