I researched an opinion piece for SCDSource about three weeks ago that is up on the site today at “How Cadence’s Mentor buy would impact EDA startups.” I start from the following premise:
I believe that the merger will be consummated, but that Cadence will not remain as one of the top three players in the industry within two to four years. I have three reasons:
- EDA is an R&D intensive business and it will be hard to retain talent in a hostile takeover. Moreover, there is considerable overlap in a number of product areas, which means that many Cadence employees will also be concerned for their continued employment, injecting uncertainty and slowing work on both sides of the merged company.
- Cadence is taking on significant debt and will have to focus on near term revenue at a time when design methodologies, development practices, and computing paradigms are all undergoing significant shifts. Their ability to nurture the new products they will need in two to four years will be limited.
- New customers are coming into the market as electronic systems incorporate more software at all levels of integration. Cadence’s ability to market and sell beyond the hardware engineering groups, and to invest ahead of revenue from relevant software teams, will be limited.
By coincidence today was the Cadence Q2 earnings call, available at http://biz.yahoo.com/cc/7/94067.html (and transcript here: http://seekingalpha.com/article/86645-cadence-design-systems-inc-q2-2008-earnings-call-transcript?source=yahoo&page=-1) for the next week and then on the Cadence site. They have revised revenue downward for the year from $1.5 Billion to $1.12 Billion, with minimal profitability. One thing I had overlooked in the earlier analysis was that they have spent about $500 million buying back their own stock from the middle of last year through March of this year: stock that is worth perhaps 35-50% less now, and money that might have been used to offset the $1.1 Billion in borrowing they need to consummate the merger with Mentor.
As of today’s call they were still full speed ahead on merger plans, as of July 11 they have acquired 4.7 million share of Mentor (about 4.3% of the outstanding shares). With that possibility still very real, I want to highlight two key strategies that I also covered in the article:
- Think longer term. Because Cadence/Mentor will be focused even more ruthlessly on near term revenue, now is the time to focus on long term opportunities and relationships.
- Focus on revenue opportunities where turmoil at Cadence/Mentor will cloud the future of many products, and slow if not inhibit a competitive response until they determine who is in charge. You will more likely be able to snatch emerging technology areas where revenue opportunities are smaller from a Cadence/Mentor perspective but still very attractive for a startup.
Postscript Aug 1: Seeking Alpha has the Cadence quarterly earnings calls transcripts available for Q4/2005 onward here: http://seekingalpha.com/symbol/cdns/transcripts
2 thoughts on “Opportunities for EDA Startups in Cadence’s Acquisition of Mentor”
Hi Sean – Do you still think the merger will happen? Can’t believe CDNS shareholders want their company to go further down the tubes.
I don’t know if it will happen or not, Cadence is certainly proceeding on a path to make it happen. Barring a change of leadership at Cadence I don’t see how it doesn’t go through. Gary Smith’s analysis is that the regulatory hurdles are significant and they may block it.
The point of my analysis was not so much whether or not the merger will happen, and I believe that it will (or certainly likely), but what actions startups should take in response. I remain fundamentally optimistic about EDA and believe that we are on the verge of another “changing of the guard” similar to what happened in the early 80’s (CALMA, Applicon, Avera giving way to Daisy, Mentor, Valid) and again in the early 90’s (Daisy, Mentor, Valid giving way to Cadence, Synopsys, and Mentor).
We work with the management of startups and early stage software firms to provide strategy and business development as an extension of their team. The question of how to plan for this merger has come up at our EDA clients and I thought it was a significant enough issue it was worth writing about.
The merger is not something I am hoping for, because I don’t subscribe to the “need for consolidation” model as the cure for EDA’s doldrums. I do subscribe to the “need for significantly more innovation” which normally comes from startups. The Cadence theory on the merger appears to be that Moore’s Law has been repealed, which lowers the need for innovation and allows them to be less concerned with “the Innovator’s Dilemma” which is that it’s very hard for larger firms to nurture new products in emerging markets, especially for new kinds of customers.
I think we have at least another decade of Moore’s Law on the current silicon substrate: companies who are planning for the opportunities this will create are not going to consolidate their design tool purchases on one large vendor. They are driven by the need to exploit new opportunities, not save costs on the ability to design at their current level of capability.