December 07, 2009
MAD Progress
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Russ Henke - Contributing Editor


by Russ Henke - Contributing Editor
Posted anew every four weeks or so, the EDA WEEKLY delivers to its readers information concerning the latest happenings in the EDA industry, covering vendors, products, finances and new developments. Frequently, feature articles on selected public or private EDA companies are presented. Brought to you by EDACafe.com. If we miss a story or subject that you feel deserves to be included, or you just want to suggest a future topic, please contact us! Questions? Feedback? Click here. Thank you!


But by August 15, 2008, Cadence finally grew tired of the effort and officially called off its $16 per share ($1.6 billion) hostile bid to acquire MGC.


Shareholders immediately expressed their opinions of this news. Shares of Cadence surged 7% during the August 15, 2008 trading session to close at $7.64 a share, while shares of MGC tanked, falling 26% to close at $10.33.


Once MGC had publicly rebuffed Cadence’s original $16 a share offer in June 2008, industry insiders said that thereafter Cadence had trouble obtaining reasonable funding terms for the more than $1.1 billion that would have been needed to do the deal, a task made more troublesome after Cadence drastically lowered its 2008 year-end guidance in late July 2008. "Although we achieved our second-quarter (2008) numbers, it was more difficult than we planned,” CEO Mike Fister said at the time.


Ultimately, the failed attempt of Cadence to take over MGC during the summer of 2008 was directly connected to the fresh news that broke on October 15, 2008, that the CEO of Cadence Mike Fister and four of his top executives had “resigned” from Cadence. Shares of Cadence, which had already lost three quarters of their value over the previous 12 months, immediately went down another 12% to $4.68 upon the news release of October 15, 2008 (Cadence closed at $4.51 per share on Friday October 17, 2008, leaving a dismal market cap of $1.17 billion).


Combined with the deteriorating revenues, earnings, and stock price endured by Cadence in previous quarters, the failed takeover of MGC meant that top management changes at Cadence were arguably inevitable. It is said at the time by EDA insiders that Mike Fister was already out interviewing other companies for a new position in the months prior to October 15, 2008. In addition to the aborted MGC bid, Cadence's inability to sell itself to a private equity firm in 2007 and an expensive Cadence share buyback were also causes for Mr. Fister's resignation
.


It can fairly be said that Cadence had also made some poor product decisions during Mr. Fister’s four-year reign. It did not focus on expansion into key areas such as system level design nor into FPGA markets. Cadence also cut back its involvement in EDAC and halted its appearances at the industry’s main trade show, the Design Automation Conference DAC). Finally, EDA industry analyst Gary Smith claimed that Mr. Fister had shifted the Cadence away from industry-standard two- or three-year product & service license contracts toward five-year agreements, enabling Cadence to book more revenue up front. The shift to longer contracts "insulated their actual earnings for
three years. At the end of three years, the bubble popped," Smith asserted.


(Of course, Bush 43’s second economic recession that began in December 2007, didn’t help Cadence either. Indeed, even MGC’s market cap had deteriorated to only $761 million as of October 17, 2008, and rival Synopsys’ market cap had declined some, although it was still a very healthy $2.63 billion on October 17, 2008).


Back to MGC and Flomerics, circa mid-2008:


In late June 2008, both Autodesk and Flomerics suddenly announced that Autodesk would not pursue its interest in Flomerics, leaving the field clear once again for MGC.


By early July 2008, reports began to appear in the press that MGC had increased its full acquisition offer to Flomerics, valuing the latter at $60 million.


Finally, on October 9, 2008, the announcement came out publicly that the MGC acquisition was at last consummated. MGC had apparently agreed to pay about $2.43 per share, or about $60 million, for Flomerics Group PLC (MGC’s original offer was ~$2.07 per share). The $60 million purchase price represented a 37% premium over the closing price on May 8, 2008, the day before MGC made its initial offer for the rest of Flomerics' shares. (By the way, Flomerics had announced in April 2008 record full-year revenues of $31.8 million. Adjusted pretax losses were $2.54 million).


Gary Carter, former CEO of Flomerics, was immediately named General Manager of the new MGC division, reporting to Henry Potts of MGC SDD. At the time, MGC said in a statement that the complete acquisition of Flomerics not only complemented MGC’s then-current offerings in printed circuit board systems design with advanced electronic cooling thermal analysis capabilities typically used by mechanical engineers, but also it broadened MGC’s product offerings into the engineering fluid dynamics (EFD) market for mechanical computer aided design analysis.


"As a supplier of design automation software,
we must consider the entire product development process and provide analysis and collaboration tools wherever we can help our customers be more competitive. As the provider of the world’s most advanced computational fluid dynamics products, Flomerics products fall squarely into this strategy. Additionally, we see significant potential with the EFD products that address multiple analysis applications in many industries," said Potts. (These statements by MGC were music to my ears at the time, since that was precisely the strategy that the MGC PCB Division was following in the early nineties. By 1993, we had already introduced our own thermal analysis software
(Autotherm), as well as connections to MCAD software such as Dassault Systems CATIA and with other MCAD vendors via a partnership with ITI. We also initiated strategic partnerships for PCB BoardStation and for MCM Station with Cooper-Chyan for their Batch Gridless Router, Quad Design for their circuit crosstalk analysis, TI, SDRC, and others. We also sought and landed over $6 million in R&D funding from DARPA, the first contract of its kind ever closed by MGC).


Also at the time of the Flomerics acquisition by MGC,
Gary Carter added that with MGC's global strength and greater financial resources, "The success and potential of Flomerics' technology, technical expertise, and customer relationships can be better cultivated and significantly enhanced."


MAD GM Gary Carter subsequently resigned from MGC in early 2009 and left the company. The search for a replacement was led by Henry Potts of SDD and ultimately led to the hiring of Dr. Buergel in August of 2009 as the new GM of MAD.


Back to the Present:


In answer to a question during our November 2009 meeting, Dr. Buergel stated that Flomerics previous revenue performance had continued apace after being absorbed into MGC as the Mechanical Analysis Division. Part of the strategy was and remains to keep the previous Flomerics sales and support force intact and separate from the existing MGC EDA sales force, since MAD serves a different market than EDA and the Flomerics team had and must maintain the CFD and MCAD experience, contacts, and industry knowledge. Indeed, the original regional sales offices of Flomerics have been kept separate by MAD from the existing MGC EDA sales offices, although some physical facilities
consolidation will likely occur over time.


Dr. Buergel enthusiastically emphasizes the concurrent engineering sales approach that he had absorbed from his SDRC and MGC days, and he wants to continue to emphasize it in MAD. He leapt to the whiteboard during the November 2009 meeting to sketch out a 3-axis Cartesian coordinate system. On the x-axis he placed a dot representing a customer’s “software product knowledge” before MAD gets involved. On the y-axis he placed a dot signifying a customer’s initial “process” knowledge. On the z-axis he placed a dot signifying a customer’s “people awareness”.


On the white board, Burgel then connected the three dots on the x, y and z axes with straight lines. Together with the origin, a sketch of a tetrahedron was created, the volume of which was meant to represent a customer’s initial capabilities prior to a sale. He then stated that in the past, traditional vendors sold software to customers with the single goal of increasing only software knowledge. Even if this goal were accomplished once the customer successfully installed and operated the software, and the dot on the x-axis moved out in the positive direction, the overall volume of the tetrahedron was only increased marginally. However, if the vendor’s approach to working
with the customer could advance all three dots, by simultaneously helping the customer increase software product knowledge on the x axis, as well as process and people knowledge on the y and z axes, the tetrahedron’s volume would increase dramatically, providing significantly larger increases in customer productivity. This, Buergel asserted, is the philosophy he will continue to champion at MAD.


Market Share:


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-- Russ Henke, EDACafe.com Contributing Editor.


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