Update: Cadence gets lift from Orcad purchase
SAN JOSE, Calif. In one fell swoop Cadence Design Systems Inc. has jumped into the No. 1 position in the EDA shrink-wrapped market and added roughly 5 percent to its lead in overall PCB market share by purchasing OrCAD Inc. for $121 million or $13 per share.
The move, announced Monday, brings to Cadence a large line of shrink-wrapped PCB and FPGA design software; arguably the largest user base in EDA-160,000 users; and Activeparts.com, OrCAD's recently announced venture into the e-commerce component-distribution business ((EETimes (PG22) (Issue:1065) , June 14, 1999)).
The move is being touted by Cadence, OrCAD and financial analysts as a "win-win." But industry pundits and competitors aren't so sure there is symmetry between the two companies and some competitors expect to nab marketshare while Cadence and OrCAD are busy sorting out the details of the acquisition.
OrCAD will be merged with Cadence's PCB team into a new group headed by OrCAD's president Mike Bosworth. Dave DeMaria, who previously led Cadence's PCB operations, will be in charge of marketing for the new group.
"The opportunity creates a true leader in PCB design," said Bosworth. "Up to now, PCB has been very fragmented. We now see an opportunity to put together complimentary strengths of both companies in technology, distribution and people that can enable us to take a leadership roll in the market."
Bosworth said the merger will allow Cadence to create a smooth growth path for designers. "We can now offer solutions for all three segments of the PCB tools market: shrink wrapped tools, mainstream tools, and high end tools," said Bosworth.
Gary Smith, principle EDA analyst at research firm Dataquest Inc. (San Jose, Calif.), said OrCAD controlled 54 percent of shrink-wrapped PCB market share in 1997 but its numbers were declining. Meanwhile, Cadence took overall market share lead in PCB in 1998. "In two years, Cadence jumped from No. 6 in PCB to No. 1," he said.
John Barr, managing director of financial firm, Needham and Co. Inc., likes the deal. "Cadence wants to merge OrCAD's front end with Cadence's back end and sell it to the mainstream PCB market," he said. "I don't see why that wouldn't work. It sounds a lot like what OrCAD was saying when they were going to merge with Summit, but that was a bit hard to swallow because OrCAD's tools and Summits tools didn't fit so well. OrCAD front end and Cadence back end sounds pretty good."
"I think it's a smart move for Cadence," said Jennifer Smith, vice president and analyst at BancBoston Robertson Stephens. "It will allow Cadence to strengthen its position in PCB and move into Internet/e-commerce. The price was reasonable and is one of the first accretive purchases we've seen from Cadence."
Smith said she believes the acquisition will boost Cadence's market share lead in PCB tools industry and expects it to grow at CAGR of 20%, well above the PCB sector's average CAGR of 10 percent.
"Cadence took the market share lead last year but we don't own the market," said DeMaria. "From a Cadence perspective, we think the combination will be a real powerhouse. OrCAD's strength has been in the front end, while our strength has been back end with Allegro and Specctra. They have the premier telesales channel in the industry and it compliments our direct channel."
DeMaria said the company will not eliminate any of OrCAD's products. Instead, it will offer as usual, OrCAD's line to the shrink-wrap market via telesales and Cadence's tools to the high end market through its direct sales channel.
The company plans to change its mainstream or ready to use offering, explained DeMaria, and will merge OrCAD's front end with Cadence's under $10,000 software Allegro Studio. This product will be sold through Cadence's VARs as well as OrCAD's VARs in Europe and Asia. Cadence will also offer OrCAD PSpice to high-end users.
DeMaria said all the OrCAD PCB and FPGA tools including-OrCAD Capture/CIS, OrCAD PSpice, OrCAD Express, and OrCAD Layout--will be integrated into Cadence's Intrica line. The hidden gem may be OrCAD's new venture with parts distributor VEBA, in which the companies jointly maintain a new e-commerce Web site and online design center called activeparts.com.
Bosworth and DeMaria said the agreement with VEBA is only strengthened by the acquisition.
"The icing on the cake is that we get this really neat Activeparts.com e-commerce software and business that has a bunch of possibilities going forward," said DeMaria. He said in addition to linking OrCAD Capture to the e-commerce site, going forward, Cadence might be able to link its high end software to it.
Analyst Rita Glover, president of EDA Today, said the acquisition will help Cadence consolidate the PCB market. "They've got a huge user base with OrCAD and a sales channel they probably needed, so it makes sense to me," she said.
Glover said the acquisition will "absolutely" help Cadence gain market share in the pc-board design market and hurt Viewlogic. Many Allegro design environments today use Viewlogic schematics as a front end, she noted. "For major customers who have that configuration, there will be a lot of pressure to migrate away from that front end," Glover said. "Viewlogic is the big loser."
Rick Lucier, COO of Viewlogic, said he doesn't expect the merger to effect Viewlogic's business rather it will enhance it.
"On the surface there appears to be a lot of overlap in terms of tools and sales channel," said Lucier. "When you have a lot of product overlap you have to carry two products or you have to consolidate-either way you create a lot of uneasiness with users. They have to do either one. They have a substantial base in either market and to think the installed base is going to invest in new tools and replace their tried and true tools doesn't make sense."
"This merger represents a market share move on the part of Cadence but is fraught with all of the challenges associated with merging two very different companies with complete and competing PCB and systems design solutions," said John Issac, senior vice president of marketing at Veribest, another competitor in the ready to use market. "We expect their customers to endure several years of confusion as the dust settles."
Rick Almeida, vice president of marketing at PADS Software, which also competes with Cadence in the ready-to-use market, said in the short term Cadence doesn't pose a threat to PADS.
"If Cadence and OrCAD are leaving things as they are, it isn't going to effect us," said Almeida. "In the long term, it gives Cadence a nice customer base to work on. They get a telesales channel but not really a VAR channel in the U.S., which is necessary for the ready to use market."
Bosworth said OrCAD expects to retain all of its 258 employees in the merger. OrCAD, which reported $48 million in revenue for 1998, was growing at 8 percent, down significantly from the 20 percent yearly growth it saw for the previous four years, he added.
"Operating in a shrink-wrapped market we enjoyed more than 50 percent market share, but the bad news is that is a relatively flat market," said Bosworth. "What is great about this deal is that we gain technology depth, while also gaining access to major accounts and Cadence's large sales force."
The acquisition, which has been approved by both company's board of directors, is expected to close in July.