If successfully completed, the acquisition will give Synopsys most of the IC design flow for "power users," and could possibly unseat Cadence Design Systems Inc. as the EDA market revenue leader. But Synopsys will inherit a civil lawsuit in which Cadence is seeking up to a billion dollars from Avanti, and so far, Cadence is showing no inclination to settle.

"The bottom line is that this merger is a bold move that instantly puts us in the leadership position in IC design automation," said Aart de Geus, chief executive officer of Synopsys. "It instantly brings the best front- and back-end design tools together under a single roof."

The acquisition will bring to an end the most controversial chapter in EDA history — the long-running criminal and civil prosecution of Avanti for source-code theft. Gerry Hsu, the former Avanti president and CEO who pled "no contest" to several criminal charges this spring, will not join Synopsys but will probably receive a payment of around $40 million.

"This merger opens up a new chapter in the history of the EDA industry," said Paul Lo, president of Avanti. "Two acknowledged leaders are joining forces to become what we believe will soon be the preeminent supplier in the EDA business."

The combination of technologies may indeed create an EDA powerhouse. According to the latest Gartner Dataquest figures, Synopsys holds 87 percent of the ASIC synthesis market, while Avanti claims 43 percent of the ASIC placement and routing market. But Avanti has most of the IC "power user" flow, according to Gary Smith, chief EDA analyst at Dataquest.

Risky deal

And yet, the legal situation will make the acquisition "a risky deal riddled with challenges," said Dave De Maria, vice president of worldwide marketing at Cadence. Synopsys apparently agrees, having purchased $500 million in litigation insurance for a premium of $335 million.

"We still have the civil lawsuit against Avanti in the works and we think it could well exceed $1 billion dollars," said De Maria. "Synopsys has insured for half of that. I think they [Synopsys] were counting on coming to us and doing a settlement of some sort but I can tell you that is just not on the table."

The acquisition, said de Geus, was driven by semiconductor and systems customers who wanted one design flow using Synopsys and Avanti technology. He also acknowledged that some customers were concerned about Avanti's future following the resolution of the criminal case this spring, and the subsequent payment of around $195 million in restitution by Avanti to Cadence.

Beyond the legal challenges, Synopsys and Avanti have many overlapping products. While Avanti's flagship product is for placement and routing, Synopsys offers full placement with its Physical Compiler product and has recently introduced routing with its Route Compiler. Both companies were gearing up to fight for the "IC implementation" market, which provides complete RTL-to-GDSII toolsets.

"Avanti is the back end for the old flow, but many of the power users believe Synopsys will be the winner in the IC implementation flow," said Dataquest's Smith. "Because of this Synopsys has been pressured by the power user community to acquire Avanti and ensure a smooth transition to the new tools. It looks like Aart [de Geus] gave in to the pressure, and became the number one company in EDA by doing it."

The acquisition is based on a fixed ratio that will offer 0.371 Synopsys shares for each outstanding Avanti share, so the actual dollar amount of the deal could be very different from $830 million by the time it closes in three to six months. Avanti will pay Synopsys a termination fee of $45 million if the transaction isn't completed. And the deal is still subject to approval by stockholders and regulatory agencies.

Unresolved legal fight

The biggest minefield faced by Synopsys, however, is Avanti's ongoing and still-unresolved legal struggle with Cadence. Avanti's reputation was badly tarnished this spring when several of the company's founders, including Hsu, pleaded no contest to charges connected with source-code theft.

"Let me be very clear. We do not condone what happened in the past," de Geus said. "We've done our homework and we are convinced that what we're acquiring today is clean. In addition, we will put forward our best effort to proactively seek a reasonable and fair settlement with Cadence on any outstanding issues at the close of the merger. If we can resolve these issues, we'll open a new chapter to a healthier and more mature EDA industry going forward."

De Geus said he has already talked with Ray Bingham, Cadence's president and chief executive officer, about the legal situation, but the two have agreed to not speak publicly about their current negotiations, he said.

Avanti's Lo said his company has not lost customers or had significant turnover since the resolution of the criminal case. "The last six years have demonstrated the character and strength of Avanti. I'm convinced this will not be lost as we join forces with Synopsys," he said.

Brad Henske, chief financial officer of Synopsys, said that Synopsys has adequately prepared for any legal liability through its insurance policy. If legal expenses total less than $250 million, he said, that amount plus accrued interest will be refunded to Synopsys. He also noted that no Avanti board members will join Synopsys' board, and that Hsu will "resign completely" before the merger closes.

Henske also confirmed that Synopsys has set aside $55 million to pay preexisting employment agreements and other costs associated with the acquisition. Much of this, it appears, will go directly to Hsu. Depending on where stock prices are at the time of the merger, Henske said, Hsu could pocket around $40 million.

In November, Hsu was granted a "golden parachute" valued at $20 million by Avanti's board of directors. An Avanti filing also revealed that Maingate Electronics Inc., Avanti's Japanese distributor, is 50 percent owned by Hsu. Henske said that Avanti will sell Maingate to Synopsys "for a net cost of zero," that Synopsys will fold it into its own Japanese subsidiary, and that Hsu will retain no assets.

Beyond legal challenges, the combined company will face a tough economic climate. Synopsys posted good results for its fourth fiscal quarter — a year-to-year revenue increase of 38 percent, to $183.6 million — but lowered its revenue expectations for the following quarter and rescinded its previous guidance for 2002.

Acknowledging a slowdown in an conference call with analysts, de Geus said, "In the last three months the semiconductor outlook has become significantly weaker. Even R&D budgets are no longer immune, and EDA expenses are increasingly scrutinized."

"There's a hidden element here," said John Barr, analyst at Robertson Stephens & Co. "They just reduced guidance to 10 percent growth. They are sending a signal that the company's health is not as good as the stock prices indicate."

But Barr and other analysts said the acquisition will generally be good for customers. "From a technology point of view this makes a lot of sense," said RBC Capital Markets analyst Garo Toomajanian. "Over half of Synopsys customers use Avanti place and route tools, and this is a faster way for Synopsys to get into the physical design market."

Bill Frerichs, financial analyst with DA Davidson & Co., said customers who previously wouldn't buy Avanti tools may do so now. "I wouldn't like to be Cadence, Magma or Monterey Design right now," Frerichs said.

Overlapping products

Synopsys competitors scoffed at the notion that the merger will instantly create a powerhouse. Cadence's De Maria noted that the two companies have significant technology overlap, especially with Synopsys on the verge of shipping a new router.

"We think there is a lot of uncertainty for customers," said De Maria. "Synopsys has a history of end-of-lifeing overlapping technologies, like they did with Motive from Viewlogic. One of two things is likely to happen. They'll kill the Avanti technology they just acquired or they'll kill their new routing efforts. I think it will be a net loss."

De Maria said Cadence is also concerned that Synopsys may become more reluctant to share file formats so that its Design Compiler and Physical Compiler synthesis tools work with physical design tools from other companies. "Synopsys has a history of keeping their synthesis and timing databases closed, and we are afraid they will become more rigid as they become more confident they can provide a total solution to customers," he said.

De Geus said that Avanti's Milkyway database will be "a key asset" for connecting and integrating Synopsys and Avanti tools. But Milkyway has not been made openly available to the industry, while Cadence has promised its Genesis database to the OpenAccess standards effort.

Avanti and Synopsys have some overlapping technologies, but the overlap is "fairly minimal," De Geus said. He said that Synopsys will "surely" continue to offer Physical Compiler, which offers full physical placement, but he wasn't so sure about the newly-announced Route Compiler, which competes with Avanti's Apollo and Astro products. "The [Route Compiler] technology will continue to evolve, but how it will be rolled out is something that should be looked at in light of what's happened," he said.

There are also areas where the two companies are complementary, de Geus said. For instance, while Synopsys has a strong digital simulation offering with VCS, he noted, Avanti's HSpice is a longtime market leader in analog simulation. He also said Avanti will fill "a major hole" for Synopsys with its extraction, physical verification, and mask synthesis tools.

"This is a backward-looking merger," said Dave Reed, vice president of marketing and solutions delivery for Monterey Design Systems Inc. "Today's physical implementation challenge cannot be addressed by assembling a group of separate point tools, even if they're sold by the same sales force."

Greg Hinckley, president of Mentor Graphics Corp., said the merger will create "one company with a very strong flow." But it won't impact Mentor very much, he said, because Mentor isn't focusing on ASIC synthesis or IC placement and routing. "It certainly is provocative," he noted.