I still don't buy the consolidation argument. There have been a number of articles recently that say 1) more innovation and start-up funding is needed in the EDA industry for growth, and 2) consolidation is needed for the industry to grow. You can't have it both ways. MENT has shown that you can grow through innovation in the EDA industry. CDNS has tried to please shareholders through a buy and cut strategy. But look a the stock prices. MENT was up 50% from the 52 week low prior to CDNS making they buyout public. CDNS is still within pennies of its 52 week low where the stock has floundered for 5 months. So I agree with Mr. Moretti's premise that this buyout is being done to allow CDNS execs to hit revenue targets and make the bonuses before leaving the industry.
MENT is growing in market share and will continue to grow. This takeover will ruin the one large EDA company that is willing to invest in innovation instead of strictly growing through acquisitions.
Just curious - wouldn't it be "monopoly" for Cadence in PCB design software and emulator business? If CDNS and MENT do merge, what products in CDN will get nixed, and what products in MENT will get nixed? Its sure that some products from both sides will eventually get dropped. So, we need to discount ( in some proportion) the revenues that will drop because of these products being dropped.
I agree with SK's point of view that consolidation is needed in the EDA industry today. But this may be one of the answers - albeit not so good one. Consolidations are quite painful and lot of people will bear the brunt in the short-term (including yours truly :)). But I think it is good for the industry in the long-term as the current startups get to benefit. When few players go from the top, the bottom ones will rise to the occasion and fill in their spots. I look forward to such drastic changes in the EDA industry which will benefit every one. As I said in the previous comments, EDA needs some major business and process innovations to sustain and thrive.
I think an alternate point of view on this might be that Mike (and probably every other executive in EDA) has finally reached a (dispassionate) conclusion about the state of the EDA industry that it is stuck. Even if incremental thinking might work in the short-term at the productline level, it won't work at the corporate level, if they want to achieve the growth targets that they have projected to Wall Street.
One the one hand, the parent Semiconductor insustry is not growing. The secular growth rate of the Semiconductor has gone from ~17% down to ~7%. The hardware R&D budgets which are one of the primary determinants of the EDA growth, are growing even more slowly.
On the other hand, the competition has deteriorated to primarily price based competition. At the 10,000' level, most product lines are undifferentiated. In EDA, anytime there are more than 2 viable alternatives, the negotiating power shifts dramatically to the customers/ buyers.
The Cadence situation may be even worse than some of its competitors in this era of consolidation deals because it's product portfolio is very imbalanced and it has some gaping holes in its portfolio with no way to plug those holes without acquiring a company such as a Mentor.
While I think Aart/Synopsys has done a better job creating a more balanced product portfolio with a few higher growth options in the portfolio in the DFM, Systems/E-SW and IP domains and a sound strategy to turn-around its Verification business, none of the companies, especially Cadence has enough growth products/ businesses in the portfolio so the short-term growth targets are achieved by pulling in deals. The only incentive for re-negotiating a deal most often is price incentives. Even that aproach is running out of gas.
BTW, I think all this hoopla about consolidation deals is either smoke and mirrors for Wall street or extreme naivete. They are another name for price based competition in today's environment.
For EDA industry, in it's current state to regain some pricing power, it has to consolidate down to 2 (max 3) suppliers. I don't think that Mike has much of a choice in Cadence's core business.
I believe Cadence, Synopsys and Mentor must seriously think about consolidation. The other options (which are unnatural for most executives) are:
a] dispassionately assess lines of business are highly (sufficiently) differentiated. Focus on those and slowly spin out everything else.
b) now that EDA is a mature industry. We can't always think about product capabilities based differentiation. Each company must assess what competency(ies), is the given company great at and is it possible build sustainable differentiation around those competencies. If so, then build a strategy around accentuating those competencies and change the basis of differentiation and streamline other areas. If they knew what they wanted to be great at, these companies would find numerous opportunities to improve their efficiencies as well. If a Southwest can redefine their basis of differentiation in the Airline industry and thrive or a Costco in the retail industry or a Mittal steel in the steel industry or an Apple in music distribution or an SAP in Enterprise SW..., I am sure given the brain power at the executive ranks of the EDA industry, a highly differentiated power house can be recreated in the EDA industry as well.
If you got to this point, thanks for your patience reading my thoughts.
SK @ www.StrategyKinetics.net
How else would Cadence raise it's perceived value in the market? The entire industry has been virtually flat for close to a decade. There is no investment in growing the market, just a group of companies stealing market share from each other.
And it can't be an antitrust issue when close to a majority of the design work is done with proprietary tools. EDA customers remain the single biggest competitor to any EDA company. TSMC will surpass the EDA industry in tool sales volume within 10 years.
The only other choice is to do real marketing, find out what the customers really need and then meet that need. But that would require real work and cooperation within the industry.
It's not necessarily arrogance. It's possibly ignorance, if the bid should develop (as it seems, initially) to a hostile takeover: This happened last in the EDA industry when Daisy (forebearer of Intergraph sw) took over Cadnetix. The result was catastrophic: Conflicting norms of behavior in sw development, including developer-specific ways of organizing and maintaining code, code written for Windows vs. Unix, and management losses, caused interminable delays in integration. The resulting combine, Daisy-Cadnetix, later Dazix, filed within a year for bankruptcy. The CEO of Daisy was new to software and to the EDA industry at the time. It doesn't seem likely that Cadence will go bankrupt because of a hostile takeover of Mentor, but Gabe Moretti's analysis of the resulting financial flop probably underestimates the problem for Cadence shareholders.
Software is not a product, like light bulbs or shoes; it is a process which requires agreeable cooperation for success.
I totally agree with Abe's view and have started a poll on this at eda.plaxogroups.com
EDA mergers that work have complimentary products and are friendly, this deal lacks both critical success factors.
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