> Yesterday, Cadence publically announced it was doing a $1.6 B hostile
> takeover bid on Mentor Graphics.
>
> 0.) If you need to be anonymous, say "please make me anon" here.
>
>
> 1.) As an EDA USER would a Cadence controlled Mentor be a good thing
>     or a bad thing for you?  Why?
>
>
> 2.) As an EDA VENDOR what did you think of this move by Mike Fister?
>
>
> 3.) As EITHER, do you want this merger to happen?  (CHOOSE YES or NO)


From: Gary Smith <gary=user domain=garysmitheda not calm>

Hi, John,

I see that you're asking what the EDA users and vendors thought about the
recent hostile bid that Cadence put on Mentor.  For my 2 cents, I thought
I'd send you the hard data on what a combined Cadence-Mentor would have on
the industry.

These are 2006 numbers as those are the most recent final numbers we have.

The 2007 numbers are in; however they are not scrubbed - a 6 week process
that rigorously checks the inputs from our yearly market survey.  We have
compared the un-scrubbed 2007 numbers and in general it appears that Mentor
has improved their competitive positioning while Cadence has remained flat.

         

We found 4 areas of high concern and 6 that looked like trouble.


FOUR AREAS OF HIGH CONCERN:

In ESL there is a problem in the ESL Verification category.  As ESL is the
design level that includes both hardware and software design & verification,
speed is of essence.  The way that is accomplished in ESL verification is
with emulation.  There are only 3 companies that have emulation boxes
capable of functioning as an ESL verification engine; Cadence, Mentor and
Eve.  A start-up Axis pioneered this category as an expansion to their
Design Engineering Acceleration and Emulation (A&E) box.  They were bought
by Verisity who in turn was acquired by Cadence.

Next comes Mixed-Signal Simulation.  Cadence has 31% of the market and
Mentor has 53%, probably a little more than that in 2007.  This gives the
combination a 84% market share, well into the monopoly category. 

Again, as in the ESL Verification, Verification Team A&E becomes a 100%
market with the combination of Cadence and Mentor.  The big problem is,
that if Cadence is forced to divest one of the combination's two A&E
groups, who are they going to sell it to?  A&E is the only hardware tools
sold by EDA vendors, all the rest are software.  Most EDA companies have
avoided getting into the hardware business.  You could say that Synopsys
has already entered the hardware business with the purchase of Synplicity
and their Hardi Rapid Prototyping system, but that is basically a board-
based product and that's a long ways from a multi-million dollar A&E box
that is housed in the "Glass House" and purchased as a capital expenditure.

The last one is DRC.  Mentor is the market leader with 60% market share,
and Cadence's legacy position of 25% drives their total market share into
the danger zone.


SIX THAT COULD CAUSE TROUBLE:

If you look at the 6 that could cause trouble the first is Mixed-Language
Simulation.  This is pretty much a one-third, one-third, one-third market
between Mentor, Synopsys and Cadence.  Cadence has been slipping recently
but their 30% market share and Mentor's 35% market share still puts them
at 65%; a bit high for comfort.

If you combine Formal Analysis with Formal Verification, which are adjacent
technologies, the combination of Cadence and Mentor gives them a market
share of 66%.  Again a bit high.

Design Team A&E really has only 3 fully capable vendors, Cadence, Mentor
and EVE. Mentor has had a hard time getting into this important market but
Cadence has done well with the Axis box.  Eve is a new start-up who is
doing well and the rest are Rapid Prototyping boards.  Cadence holds a 63%
market share, however if you remove the numbers for the Rapid Prototyping
vendors, the numbers are a little grimmer; Cadence 81% and Eve 19%.

The next 2 are Analog Verification and Custom Layout.  The combination of
Cadence and Mentor would give market shares of 84% and 82% respectively.

I have not red highlighted either as they both have to do with Cadence's
long standing Analog Franchise.  This franchise has recently come under
attack by a group of start-ups, Ciranova being the main one, and now Magma
and Synopsys.  This year they will all announce tools that can read Pcells,
the basic building blocks of Cadence's analog design system which are
written in SKILL, Cadence's proprietary scripting language which is the
intellectual property that holds the franchise together.  We therefore
expect this competitive imbalance to sort it out in the near future.

The last is the Printed Circuit Board market as a whole.  This is another
special case.  It's obviously trouble but when you dig into the market
conditions it could easily be of high concern.  The 3 main players hold
68% of the market 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 2 player in the PCB market.


LEAKAGE:

Now let's look at the numbers from a different angle and see if this merger
makes any sense.

It's been entertaining to watch the reasons for this merger change from the
"synergies" between the two to what now Wallstreet calls "Leveraging Up", a
term that should strike fear into most Cadence employees.

The idea is that a company with larger financial resources, and an aging
product line, acquires a company with smaller financial resources and a more
attractive product line, throws away their old products and reinvents itself
as a leading edge provider of whatever product is involved.  The question
that never gets asked, by Wallstreet, is why was the original product no
longer state of the art?

What invariably happens is called Leakage.  That term describes the number
of customers, and related revenue, that decide to jump ship and move to a
competitor.  During a hostile takeover that can be quite high.  The loyalty
is with the company being bought, after all there were reasons beyond
product that they were not buying from the acquiring company.  In the short
term you need to take into consideration the chaos in the sales organization
this type of merger produces, leaving openings for the competition to take
orders away from the combination.  And long term there is the loss of R&D
resources both by engineers that do not want to work for the hostile
acquirer and through the enviable layoffs this much product overlap creates.

At 50% leakage, which is certainly possible between the hostile takeover,
regulatory mandates and Cadences already declining market share, Cadence
would end up with an extra $364 million in revenue.  At 30% leakage that
number would be $510 million, so you have a 3 or 4 year payback on the
$1.6 billion dollars spent.

         

Another strange comment coming out of Wallstreet is the possibility of
Synopsys becoming a white knight.  I guess they don't hear all of the
laughter coming out of Mountain View right now.  If the merger goes through
Synopsys will pick up $200 to $300 million dollars from the leakage, plus
some of Mentor's top people.  Not bad for doing nothing.  Plus Synopsys
realizes that a Synopsys/Mentor merger makes as little sense as a
Cadence/Mentor merger.  Not that they wouldn't love to have the Calibre
product line, but that would get into regulatory problems on the DFM end.


THE OUTCOME:

We can imagine three possible outcomes.  The first that came to mind was
the implosion of Daisy in 1989.  The environment was the same.  Daisy had
been replaced as the number one EDA vendor by Mentor.  They had lost the
technical lead and were declining in revenue.  They needed a merger to
bring them out of their downward spiral.  However when you look into the
bankruptcy, it was their irresponsible borrowing in order to pull off
the merger that did them in.  Cadence is in much better financial shape.

The horror story from the design community is this:

  1. The merger goes through.
  2. Through the chaos there is a considerable loss of R&D engineers.
  3. To further the problem Cadence under invests in R&D.
  4. And the combine companies end up missing the window for the
     32/22 nm tools.

This would be strike 3 for Cadence and they would no longer be considered
a viable EDA supplier to the Power Users, the largest market in EDA.  That
would leave Synopsys, and in the back end Magma, as the only viable major
EDA vendors.  This could drive the semiconductor community into reverting
to in-house tool development to solve their design problems.

The most probable outcomes come from the Semiconductor Industry.  In the
late 1980s GE acquired RCA semiconductor, both were roughly $400 million
operations.  Then Harris semiconductor, another roughly $400 million company
bought the combined RCA and GE Semiconductor operations.  When the dust
settled, Harris emerged as a roughly $400 million company.

    - Gary Smith
      Gary Smith EDA                             Santa Clara, CA