Magma Design Automation has paid $12.5 million to end a long-running patent dispute with Synopsys Inc., and the expense may well be worth it. Magma is not only letting go of a legal expense that has strongly impacted the company's bottom line, but early indications are that its market capitalization, and ability to do future acquisitions, will significantly improve as well.
Magma and Synopsys announced late Thursday night (March 29) that they have agreed to settle all pending litigation between them, resolving separate court cases in California and Delaware. As part of the settlement, each company is cross-licensing four previously disputed patents to the other, as well as any related applications.
Both companies agreed not to initiate future patent litigation against each other for two years, provided certain terms are met. There was no admission of guilt. Aside from the $12.5 million payment from Magma to Synopsys, all other terms of the out-of-court settlement are confidential.
"This just removes an expense item from our budget and allows us to focus on our customers and our business," said David Stanley, Magma general counsel. He said that Magma has been paying around $11 to $12 million a year in legal expenses. That's a big deal for a company with annual revenues currently around $180 million.
Brian Cabrera, vice president and general counsel at Synopsys, said his company got what it wanted the return of disputed patents to Synopsys ownership. "We absolutely feel like we won this," he said. "We got the technology back in our name, and now we can move on and not waste legal resources and get back to business."
Magma and Synopsys have been locked in a complex legal dispute since 2004, when Synopsys first sued Magma for allegedly infringing two patents. Claims and counter-claims accelerated, resulting in separate court cases in California and Delaware and a number of disputed patents. At the time of the resolution, Stanley said, Magma was asserting four patents in Delaware, and Synopsys was asserting one, while Synopsys was asserting three patents in California.
Magma recently has been reporting record revenues with heavy GAAP losses, in part due to legal expenses. In its third fiscal 2007 quarter ending Dec. 31, 2006, for instance, the company posted $45.1 million in revenue with a $13.6 million GAAP loss. Magma reported that it spent $2.3 million, or 4 cents per share, on litigation in the fiscal 2007 third quarter.
Perhaps more significantly, Magma's stock price was depressed for years because of the legal action and the ongoing threat of an injunction against its products. "Not having to spend $12 million a year is a big deal," said Rich Valera, analyst at Needham and Company. And the resolution, he said, "frees up the overhang on their stock, so they have better currency to make acquisitions or further clean up their balance sheet."
In mid-day trading Friday, Magma stock had risen from a $10.22 close Thursday to around $12 per share. Magma stock was trading in the $8 range earlier this year. The stock received a boost in February, Valera noted, following a ruling in California that two disputed patents are jointly owned by Synopsys and IBM. That was widely viewed as a win for Magma, since part of its defense rested on its claim that IBM was the co-owner of the disputed technology.
The resolution is good for both Magma and Synopsys, and is a win for the EDA industry, said Raj Seth, analyst at Cowen and Company. "It's nice to have litigation resolved and out of the way so people can focus on business," he said.
Seth said that short-term market dynamics won't change much, but he said the patent resolution removes a lot of uncertainty for Magma. "It gives them back more powerful currency, and lets them engage in a different way with partners or people they may think about acquiring," he said.
"Actually this is a very positive move for all designers," said Gary Smith, chief analyst at Gary Smith EDA. "This gets the rock off of Magma's back, and they can now address other design areas that need
good EDA solutions."