& Mentor - the Numbers"
Cadence & Mentor - the Numbers
Cadence’s Hostile Takeover Bid
One of the strangest comments in Cadence’s somewhat surreal
hostile takeover bid for Mentor was Mahesh Sanganeria’s
comment, “We do not believe the deal will face regulatory
push back.” With statements like that being thrown around
we thought it was a good time to look at the actual numbers.
Cadence + Mentor Competitive Positioning
The mistake most financial analysts make is to look at
EDA as one or at best three competitive environments.
If you take time to download the three EDA Wallcharts
from our website you will find that this is a market made
up of 85 sub-applications as of the end of 2007, which
comprise the competitive environments in EDA. There are
technology adjacencies and marketing environments that
allow you to combine these sub-applications to simplify
your analysis but you need to have a background in all
of these sub-applications to make intelligent combinations.
A good example, and the simplest, is the Printed Circuit
Board (PCB) market. PCB design tools are the oldest of
the EDA tools. In the mid 1990’s the acquisition of Cooper
& Chan Technology (CCT), by Cadence, caused a 75%
reduction in the number of PCB vendors. CCT sold the most
popular PCB router of the time and once Cadence cut off
licensing the router to other PCB vendors, most didn’t
have the R&D capability to develop their own router.
At that point most Users started buying the bundled PCB
tools offered by the three leading vendors. Therefore,
we have been able to combine the 10 sub-applications that
make up the PCB market, for this analysis. We’ve made
some other combinations, such as Formal Analysis and Formal
Verification, as they are adjacent technologies and we’ve
dropped the sub-applications that have little impact on
this competitive analysis, giving us 22 sub-applications
that comprise the competitive landscape for a combined
Cadence and Mentor company.
These numbers are their 2006 numbers as those are the
most recent final numbers we have. The 2007 numbers are
in; however they are not scrubbed - a six-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.
Cadence/Mentor 2006 numbers – Competitive Positioning
The results aren’t surprising. We found four areas of
high concern and six that looked like trouble. 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 three 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.
If you look at the six 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,
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 three 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 two 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 three 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 two in the PCB market.
Now let’s look at the numbers from a different angle and
see if this merger makes any sense.
Cadence/Mentor 2006 numbers – Leakage
It’s been interesting to watch the reasons for this merger
change from the supposed 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 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 inevitable 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 three or four 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.
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 32/22nm
tools. This would be strike three 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