Practical Chip Design

Jun 18 2008 11:43AM | Permalink | Email this | Comments (12) |
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When the news broke yesterday that Cadence had made an unsolicited offer to buy Mentor Graphics, it raised eyebrows even among people who had been predicting further consolidation in the EDA world. The obvious problem is that there is little or no synergy between the major product lines of the two companies—in fact, they are nearly across-the-board competitors. The only exception is the IP business, in which Mentor has persisted—even though it has reportedly been shopping the business around—and Cadence has backed away. So what could be Cadence's motivation?

One possible answer comes from word on the show floor and in the suites at DAC last week. According to the stories, Cadence has been trying to stave off a significant drop in revenue by offering very long-term—up to eight-year—license agreements to its major accounts, and recognizing much of the revenue in this year. In some cases, the word is, these license agreements even cover as-yet-undeveloped future products.

If that's the case, Cadence may be selling its future in order to stave off its present. If the company pulls in much of the revenue from its major accounts for the next several years—or even most of the next decade—there are only a couple of possible ways to avoid substantial contraction in 2009. One would be new customers. That seems unlikely, given the current state of the industry, unless Cadence can find a huge untapped pool of designers in Asia. The other would be a watershed of new products not covered by the company's comprehensive all-you-can-eat license agreements.

And that may explain the offer. Cadence may be trying to acquire not Mentor's technology, nor its customer base, but simply its future revenue stream. If that is the case, then Mentor shareholders should look at the proposal not as a strategic merger, but as an outright purchase of future cash flow. And they should expect to receive a substantial cash premium over the expected value of that cash flow, given that selling the company pretty much ends the up-side for Mentor's product line.

But is there any basis to this speculation? Talking with industry analyst Gary Smith, president of Gary Smith EDA, yesterday, I came away with the conclusion that there may be. Smith agreed about the lack of strategic fit. "This makes no sense strategically," he said. "There's almost complete overlap in some areas. This isn't about adding complementary product lines, it is about bulking up."

Could it be true that Cadence is offering eight-year license agreements? "Yes," Smith confirmed, "Cadence is offering an eight-year agreement to at least one customer, Fujitsu." He did not have direct knowledge of any other such offers, but was concerned that the Fujitsu agreement could represent a business model. "If so, they are mortgaging their future," Smith said.

Cadence has not as yet responded to a request for an interview on the subject, so we don't have first-hand confirmation, either from Cadence or from other customers. So at this point we have a series of very suggestive dots, not a line drawing.