Designs on Mentor

The electronic design automation sector has always been one where rumour and intrigue abound. And one of the companies which has consistently featured in much of that rumour and intrigue is Cadence Design Systems. It’s in the news at the moment because of its hostile approach to rival eda provider Mentor Graphics. But it popped to the top of the news agenda last year, when speculation was rife that a consortium of venture capitalists was ready to buy the company and take it back into private hands. It didn’t happen and subsequent developments in the financial world mean that Cadence is likely to remain a public company for some time. With that apparent diversion out of the way, ceo Mike Fister has returned his focus to moving Cadence forward. Cadence is still the leading eda vendor. Its 2007 revenues of $1.6billion put it $400million ahead of Synopsys, the next largest company. But Cadence’s fortunes are waning and its sales are slowing – maybe even reversing. The bid for Mentor is seen in some quarters as a way of restarting the Cadence engine. The eda sector has always been more active than others when it comes to acquisition. Many observers have concluded that major eda companies believe it’s cheaper to buy a start up with a point solution than it is to develop the same technology in house. For this reason, the eda sector has been a merry go round for years. Start ups in the past often had no plans to launch products, only an exit strategy – being bought up by Cadence or Mentor. And, illustrating the point, Cadence says it has made 36 acquisitions over the last decade. Has Cadence made the right call in this instance? Cadence first approached Mentor in April, but was rebuffed. In response, Fister published an open letter backing up the hostile bid. According to Fister: “We believe that a combined Cadence-Mentor will provide customers a broader and more fully integrated product and technology portfolio in a timeframe that better enables them to address urgent and complex challenges associated with their next generation product development.” Mentor ceo Wally Rhines’ analysis was that, firstly, Cadence wasn’t offering enough, but also such a deal would run into regulatory problems. “For these and other reasons,” said Rhines, “our Board unanimously rejected the proposal.” Whilst a number of financial analysts believe the deal makes sense and will close, given time, eda analyst Gary Smith (www.garysmitheda.com) believes there are four technology areas where overlap between the two companies’ portfolios would attract the regulator’s attention. And there are six more areas where Smith sees what he describes as ‘problems’, one of which is pcb design. “The three main players hold 68% of the market,” said Smith, “with Zuken slipping behind the market leaders Mentor and Cadence. The rest of the vendors – and there are quite a few – are either point tool vendors or vendors that target the lower price market. That means the smaller players – and even Zuken – would have a hard time filling the void made by a Cadence/Mentor merger. There would be no meaningful number two in the pcb market.” It’s another situation where market dominance might cause concern. The deal revolves around two things. First of all, Mentor’s board has to approve it and that will need shareholder pressure to change the current view. Whether Mentor’s shareholders are in the mood to cash in is unclear: more money might help. However, the fact that Mentor has recently retained two big financial companies – Goldman Sachs and Merrill Lynch – to advise it on the bid suggests that, even if the idea is breathing shallowly, it’s not quite dead. But even if shareholders do convince Mentor’s board to accept the deal, it’s the regulators that could pull the rug from under it. A combined Mentor and Cadence would hold a significant share of the eda market and US antitrust legislation would likely require some parts of the business to be sold, bringing some cash benefits, but losing longer term revenues. Let’s say the deal does complete. Smith then raises the spectre of what’s being called leakage. In the short term, this means some customers finding other suppliers; in the long term, loss of staff through disaffection and layoffs. Fewer customers mean lower sales revenues than forecast and a longer payback time on the deal. Loss of staff – significant assets in the complex eda world – means product development times gets stretched and maybe you get beaten to market by a competitor. There appears to be no grey areas in the views being expressed by knowledgeable observers – you’re either for the merger or against it. When the Cadence offer first emerged, Smith fell firmly into the latter camp. “It is a really bad idea,” he said. However, bearing in mind the current state of the markets, Mentor stockholders might just think it’s a really good idea.