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:

  1. 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.
  2. 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.
  3. 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