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coolhandluke
The other opportunity other than just levering up is to do smart strategic ...
EDA to private equity, part 2
Rahul Razdan
5/25/2012 2:17 AM EDT
A surprising number of people seem to agree with a comment in my recent posting on EE Times, that EDA is run like a family business. I received a lot of feedback on this posting, including a number of recurring questions. I wanted to take the time to address them directly.
1. Why would private equity be interesting? Is EDA interesting enough?
EDA is in the sweet spot for private equity (PE) companies. PE companies like a situation where there is predictable cash flow, and love it even more if the cash flow can be increased over time with operational efficiency. In these two situations, a private equity firm can use financial leverage to get very good returns for their limited partners.
2. If it's such a good idea, why is it not done ?
With EDA, the “family” does not want to sell the business, so PE firms are left to consider a move into EDA on a hostile basis. Besides the significant issues of “poison pills,” many PE firms have charters which do not allow for hostile takeovers. Thus, we wrap back around to the willingness of the board of directors of the major EDA companies to consider a private move on their own accord.
3. Is EDA software really sticky? Isn’t the real problem competitive discounting?
There are situations within EDA markets where the switching costs are not high. These include areas where there are reasonably well specified standards such as HDL and Circuit simulation. However, for the vast majority of EDA, the cost of change is very high. Further, for any customer considering this change, they must ask the question: what is the opportunity cost of my design team working on infrastructure shifts versus productive design activity?
The amazing part is that in many of the segments one of the large companies has dominant market share (for example, Cadence in analog design). As a standalone company in the private setting, there would be no reason to discount with that sort of marketshare. However, the need for growth drives a process of discounting, and this may indeed drive a competitive response which accelerates the discounting process.
4. What about the debt? Would this not be an issue much as it was for Freescale? What about Cadence (which negotiated to sell itself to private equity firms in 2007; the talks broke down)?
Obviously, price is always a consideration for any buyer, and any business transaction. On the issue of debt, this is a decision for the buyer. There is no particular requirement to use debt. However, it is true that with a stable/rising significant cash flow, there is a large temptation for PE firms to use debt to add leverage to the return, and with the kind of cash flow possible in EDA, this would make perfect sense. On Freescale, there are two important differences: The price multiple for Freescale was high (one of the largest buyouts ever), and Freescale did not have the potential for cash flow as compared to EDA companies.
On Cadence, the transaction was happening at the height for Cadence stock, so certainly not the right time to buy. However, when Cadence hit near $3/share low, the company was an incredible opportunity for savvy buyers. The good news is that this opportunity will come again with all the major EDA companies.
Rahul Razdan has more than 25 years of executive management experience in a variety of roles in sales, R&D, and marketing in the electronics industry, including a stint as general manager of Cadence's Functional Verification Business Unit. Most recently, he has been involved with several startups, and consults on strategy through his association with System Centering Solutions. He has authored numerous technical papers and is named on 24 issued patents.
1. Why would private equity be interesting? Is EDA interesting enough?
EDA is in the sweet spot for private equity (PE) companies. PE companies like a situation where there is predictable cash flow, and love it even more if the cash flow can be increased over time with operational efficiency. In these two situations, a private equity firm can use financial leverage to get very good returns for their limited partners.
2. If it's such a good idea, why is it not done ?
With EDA, the “family” does not want to sell the business, so PE firms are left to consider a move into EDA on a hostile basis. Besides the significant issues of “poison pills,” many PE firms have charters which do not allow for hostile takeovers. Thus, we wrap back around to the willingness of the board of directors of the major EDA companies to consider a private move on their own accord.
3. Is EDA software really sticky? Isn’t the real problem competitive discounting?
There are situations within EDA markets where the switching costs are not high. These include areas where there are reasonably well specified standards such as HDL and Circuit simulation. However, for the vast majority of EDA, the cost of change is very high. Further, for any customer considering this change, they must ask the question: what is the opportunity cost of my design team working on infrastructure shifts versus productive design activity?
The amazing part is that in many of the segments one of the large companies has dominant market share (for example, Cadence in analog design). As a standalone company in the private setting, there would be no reason to discount with that sort of marketshare. However, the need for growth drives a process of discounting, and this may indeed drive a competitive response which accelerates the discounting process.
4. What about the debt? Would this not be an issue much as it was for Freescale? What about Cadence (which negotiated to sell itself to private equity firms in 2007; the talks broke down)?
Obviously, price is always a consideration for any buyer, and any business transaction. On the issue of debt, this is a decision for the buyer. There is no particular requirement to use debt. However, it is true that with a stable/rising significant cash flow, there is a large temptation for PE firms to use debt to add leverage to the return, and with the kind of cash flow possible in EDA, this would make perfect sense. On Freescale, there are two important differences: The price multiple for Freescale was high (one of the largest buyouts ever), and Freescale did not have the potential for cash flow as compared to EDA companies.
On Cadence, the transaction was happening at the height for Cadence stock, so certainly not the right time to buy. However, when Cadence hit near $3/share low, the company was an incredible opportunity for savvy buyers. The good news is that this opportunity will come again with all the major EDA companies.
Rahul Razdan has more than 25 years of executive management experience in a variety of roles in sales, R&D, and marketing in the electronics industry, including a stint as general manager of Cadence's Functional Verification Business Unit. Most recently, he has been involved with several startups, and consults on strategy through his association with System Centering Solutions. He has authored numerous technical papers and is named on 24 issued patents.
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coolhandluke
5/25/2012 2:30 PM EDT
The other opportunity other than just levering up is to do smart strategic things that one can't do in the public eye. when cdns was on the block some speculated that they might raise analog tool pricing. certainly ST customers would scream and make them miss numbers but perhaps one wouldnt care without wall street ( they are often dopes too) attention. At the time there was no alternative.
"operational effeciency" isn't so easy. one could cut R&D to goose st CF......perhaps that was the plan back then but in this industry you go a couple nodes then you're dead and then you'll cry about crap tech tools. careful what you wish for....
EDA execs aren't as stupid as you imply esp as many own big chunks of their stocks.
At $3 CDNS was a gift but those who bid at 20+ who did all kinds of due prior dillegence were exposed as not having real conviction. Smart public investors and hedge fund made great returns. true the board never would have agreed to sell at the bottom but w a big premium many shareholders would have taken a bid.
when this opportunity "comes again" then i hope the author sells his house and buys cdns or snps stock like he wishes he did last time. So easy to look backward...
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