EDA Industry Update September 2008 -- What did the Last Quarter Bring?

Commentary: EDA Industry Update September 2008 -- What did the Last Quarter Bring?

by Dr. Russ Henke and Dr. Jack Horgan
Henke Associates


In the May 2003, December 2003, February 2004, August 2004, December 2004, February 2005, May 2005, August 2005, December 2005, February 2006, May 2006, August 2006, December 2006, February 2007, May 2007, August 2007, November 2007, March 2008, and June 2008 EDA Commentaries by the authors (published on EDACafé.com), the then-current yearly and quarterly financial performances of a selected group of publicly traded Electronic Design Automation (EDA) companies were analyzed and compared. Expectations regarding the future financial performances of these same EDA entities were documented as well. The originally selected companies were Altium, Ansoft, Cadence, Magma, Mentor Graphics, Nassda, Synopsys, Synplicity and Verisity.

Note: As part of continuing EDA industry consolidation, two previously-selected EDA vendors, namely Verisity and Nassda, had been acquired by others and hence were dropped from the authors' quarterly EDA Commentaries. More recently, EDA vendor Synplicity was acquired by EDA vendor Synopsys, and EDA vendor Ansoft was acquired by MCAE vendor ANSYS. Consequently, both Synplicity and Ansoft will no longer independently appear in these EDA Industry reports.

This September 2008 report covers the performances of the remaining EDA vendors for the nominal Second Quarter of 2008. In this issue, EDA News Highlights are followed by the revenue & earnings performances of the selected group of EDA players for Q2 2008, and then EDA vendor by vendor details. EDA Vendor stock prices are discussed. Finally, individual EDA vendor forecasts for Q3 2008 are provided. Enjoy!


EDA News Highlights

CADENCE vs. MENTOR GRAPHICS:

These two members of the 'Big 3' EDA software vendors oligopoly have been making M&A headlines on a frequent basis since just after the last EDA Commentary was published three months ago.

Mergers & Acquisitions (M&A) are hardly rare in the world of Computer Aided Engineering (CAE) or Computer Aided Design (CAD). Indeed, seldom does a quarter pass without one Electronic Design Automation (EDA) vendor buying another. (The same is true in the Mechanical CAE and Mechanical CAD/PLM industries).

Indeed, being acquired by one of the top three vendors in EDA (or in MCAD) is a favorite exit strategy for small start-ups that develop a specialized or breakthrough technology. This exit path is especially attractive as the IPO market for venture-backed companies dries up. It is often the way for the larger software vendors to make up for their own relative lack of internal R&D funding.

While EDA companies usually “stick to their own kind” and buy smaller EDA companies, and MCAD companies likewise, it's not unheard of for crossover to occur. For example, as mentioned above, MCAE vendor ANSYS recently acquired EDA vendor ANSOFT.

(As another example, MCAD vendor PTC shares were up sharply the morning of September 8, 2008 after news reports said that the company had hired Goldman Sachs to find potential buyers. The story said that, according to “industry sources,” several of PTC’s larger competitors in the MCAD (and EDA?) computer-aided design segment, as well as private equity investors, have received data on PTC).

More unusual, however, is for one of the leading EDA or MCAD vendor companies to try to acquire one of the other members of their respective oligopolies.

But just such a possibility surfaced in the news in mid-June 2008, wherein CADENCE (San Jose, CA) was reportedly pursuing MENTOR GRAPHICS (Wilsonville, OR). CADENCE, SYNOPSYS, and MENTOR are currently the Big 3 EDA vendors, in that order revenue size-wise (except in Q2 2008, when SYNOPSYS took over the revenue share lead for the moment among the Big 3. See the Q2 financial reports below).

Founded in 1981, MENTOR reported revenues in 2007 of about $850 million. CADENCE was founded in 1988 and sported revenues of more than $1,600 million in 2007. (Their respective current revenue levels are under heavy pressure in 2008 … see 2008 forecasts below in the body of this EDA Commentary).

Rumor had it in June 2008 that CADENCE approached MENTOR on a friendly basis some months earlier regarding an all-cash acquisition, but CADENCE was rebuffed. On June 17, 2008, CADENCE revealed to the public that its offer to MENTOR was for $16 per share, a 30% premium over MENTOR's closing price on June 16. Industry sources said that CADENCE, once rebuffed, then launched a hostile takeover bid for MENTOR.

In June, MENTOR issued a statement rejecting the CADENCE offer on two grounds - that it was too low and that the merger would have trouble passing federal antitrust review. "For these and other reasons, our board unanimously rejected the proposal," wrote MENTOR CEO Dr. Walden Rhines. (Dr. Rhines joined MENTOR in 1993 from TI).

For its part, CADENCE downplayed the possible antitrust issue. CADENCE also said the merger “would lower software costs and benefit electronics makers because CADENCE and MENTOR could 'share' sales and administrative staffs”. Further, CADENCE CEO Mike Fister argued that the software products of CADENCE and MENTOR are “complementary”. (Mr. Fister joined CADENCE in 2004 from Intel).

Should it eventually be consummated, it would be highly unusual if this merger, like many others, did not result in significant numbers of employee layoffs. Moreover, there are several product lines at both EDA vendors that are arguably directly competitive.

But hey, hostile takeover attempts are the signs of our times (think Microsoft-Yahoo, Staples-Corporate Express, Electronic Arts-Take Two, InBev-Anheuser Busch, …).

Indeed, it was reported in the Portland Business Journal on June 24, 2008, that MENTOR itself was then pursuing British company Flomerics Group PLC with an offer that Flomerics' board ironically said was too low. Flomerics is a vendor of Computational Fluid Dynamics (CFD) simulation software.

Well, it now looks like all the 'Big 3' EDA vendors will be around, at least for awhile.

On August 15, 2008, CADENCE finally grew tired of the effort to acquire MENTOR and called off its $16 per share ($1.6 billion) bid.

Shareholders immediately expressed their opinions of this news. Shares of CADENCE surged 7% during the August 15 trading session to close at $7.64 a share, while shares of MENTOR tanked, falling 26% to close at $10.33.

By the way, MENTOR stock is trading at around $12 as of mid-day September 4, 2008, Market Cap of $1.09 billion. CADENCE is trading at around $8, Market Cap of $2.03 billion. (As an aside, SYNOPSYS Market Cap is ~$2.95 billion).

Industry insiders say that since mid-June, CADENCE had been having trouble obtaining reasonable funding terms for the more than $1.1 billion needed to do the MENTOR deal, a task made more troublesome after CADENCE lowered its 2008 year-end guidance in late July 2008. "Although we achieved our second-quarter numbers, it was more difficult than we planned,” CADENCE CEO Mike Fister said. (See the earnings Table 4 for Q2 2008 in the article below, and the detailed report on CADENCE financials in the sequel).

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