I guess that my title sums up the strategic blunder that Cadence is making in their bid for Mentor Graphics.
So, why is this such a big mistake for Cadence and the EDA industry?
- Product overlap – a successful acquisition has a complement of products, not extreme overlap. Both companies have tools that overlap in the following areas: Hardware Emulation, Verilog Simulation, VHDL Simulation, VHDL AMS Simulation, SPICE circuit simulation, Fast SPICE circuit simulation, IC layout, Place & Route, DRC, LVS, OPC, DFM, ATPG, PCB layout, schematic capture, logic synthesis, FPGA flow.
- Hostility – Mentor simply doesn’t want to be acquired.
- Debt – Cadence would have some $1.1B in debt after the deal. How are they going to pay for that?
- Anti-trust – The number 2 and 3 EDA players merging would get close scrutiny.
Yes, in the very early days Cadence rose to a #1 position in EDA by shrewd company acquisitions which for the most part were Complementary and Friendly, the opposite of the Mentor bid.
I hope that this acquisition fails because it really wouldn’t bring the EDA industry anything new, in fact the combined companies would have a lower revenue because of the internal bloodbath that would ensue as rival product groups had to fight for their existence, followed by the largest EDA layoff that the industry has ever witnessed. When you have so much internal fighting the sad side effect is that the sales force doesn’t know which product to sell, how they are being compensated, and if they will even have a job tomorrow with all of the sales territory overlap. Sales plummet, the installed base believes the FUD and starts to talk with Synopsys and Magma about new deals.
If the merger does fail then I think that Michael Fister of Cadence will be so embarrassed that he will have to exit EDA and return to the land of the Semi companies.
Wally Rhines should hold his ground and keep Mentor intact.
Good analysis, Daniel. I’d also notes that Mentor distribution channels – in Asia, Europe, etc – won’t add anything that Cadence doesn’t already posses. Although tool-wise, Mentor does have a strong presence in the FPGA and board level markets.
Unfortunately, for consumers, one economic effect of consolidation by market leaders is to drive up the price of their products. This won’t happen right way, but with fewer EDA vendors on the field, the remaining players can push for higher prices.
John,
The very few successful EDA mergers that have ever happened were only when the products were complimentary and the deal was friendly.
Since this deal has none of the ingredients for success it can only be a failure.
Daniel
This would enable cadence to enter the FPGA market as well as kill a competetion. It would be interesting to watch.
Why would a Cadence shareholder want to pay $1.6B for acquiring Mentor only to see revenues increase by $200M-$300M?
Competitors like Synopsys and Magma are having a wonderful time selling FUD and taking orders away from CDN and MENT, until this deal dies or is accepted.
Some overlap from what was said previously, but here are my 6 reasons why I will give odds that this will not happen:
1 – This is a hostile takeover bid and Mentor already rejected a previous offer. Don’t expect Mentor to go softly into that dark night.
2 – About half of the Cadence and Mentor product lines overlap, depnding on who you ask. Exactly what you don’t want in a merger. I can only imagine the fighting that will go on between competing product groups as they try to pare down or merge their products and produce a coherent integrated product offering. Ugly.
3 – This will basically sideline the combined company for about a year as they figure out what to do and communicate with their customers.
4 – Antitrust issues, both at the top-level and individual products. When Synopsys acquired Viewlogic and Avanti, the FTC required them to divest certain products where they had too large a market share. What will they do with their board-level products? Hardware acceleration?
5 – Customer displeasure. Nuff said.
6 – As a Cadence shareholder, why would you want to spend $1.6B to get perhaps 25% of that ($2-300M) in additional annual revenue.
Of course, looking at the odds being set by the investors, MENT closed yesterday at 12.33 and closed today at 14.98. So they are handicapping 3:1 that this will happen.
Cadence is in serious trouble; Their technology is becoming less relevant and theie market share is declining Mentor is gaining ground on thm every day. This is a desperation move on Cadence’s part because they’ve been out innovated and are losing their edge in the industry.
This merger kills bio-diversity and is bad for the eda ecosystem.
Just because it won’t work doesn’t mean that it won’t happen.
The Daisy/Cadnetix -> Dazix merger is a potential benchmark for this proposed deal. For some detail on this see http://uccstuff.com/e-Presentations/Commitment%20Letters/Cases/Daisy.pdf
In particular read the last page with Judge Fernandez’s opinion. His opening paragraph should encourage you to read the rest:
“It is impossible not to recognize that this is a case of biting off more than one can chew. Daisy was not satisfied with being a major player in the computer field; it decided to gobble up another major player – Cadnetix. It thought that it would then be an even bigger and more powerful company. Instead, it choked on the bite. Its trustee in bankruptcy is now looking for a deep pocket.”
You wonder in a year or two if we will see Cadence substituted for Daisy and Mentor for Cadnetix.
Sean,
Yes, I remember the Daisy/Cadnetix merger fiasco and this is certainly Deja Vu with Cadence/Mentor.
Even the Mentor/Silicon Compiler merger had similar fatal characteristics:
1) Product overlap
2) Culture mismatch: Silicon Valley vs Oregon
Daniel
This deal reminds me of our adventure in Iraq. It seemed like a nice idea to create a US friendly democracy next to Iran but the aftermath was untenable.
Let’s hope that we don’t see Fister standing in front of a Mission Accomplished banner the day this deal closes.
For a more detailed exploration of the product overlap see Chris Edwards’ analysis on Shrinking Violence at http://blog.shrinkingviolence.com/2008/06/overlaps-r-us.html
This proposed merger has the fingerprints of failure all over it. Here are a few of the reasons it is bound to fail.
1) Sales in the EDA industry is more based on the personal contacts made by the sales force and the FAEs than the strength of the product offerings. After the merger the sales force will see a lot of layoffs on the Mentor side. These sales people are going to find comfort by applying to Synopsis for a job. They will carry a major chunk of Mentor customer base to Synopsis.
2) After the merger, Cadence will have a slew of products that will be dfficult to support. Especially some of the Mentor legacy products will have to be scrapped or be supported without proper support groups just because the customers don’t want to switch to the Cadence products right away. Mentor’s support groups have an engraained culture that will be hard to change over night. There is a cultural bond between the customer, sales, FAE, customer support and engineering at Mentor Graphics. This bond can be very fragile after a takeover. The sales and FAE’s who for years have been touting the superiority of their products while putting down the cadence products will have a tough time to sing the new song in front of the customer.
3. The only upside to such a merger is the sprout of some new EDA startups by Mentor employees who would rather leave the company than be part of the marriage. They will only serve as new competition for Cadence a few years down the road.
The merger will happen. Unlike the Microsoft/Yahoo merger where google played a significant hand under the table to prevent the merger, there is no such player in the EDA industry to prevent this merger from happening. Whally had been at the helm for more years than he would have anticipated when he took over the reins from Tom Bruggere. There is no added incentive for him to stick around. In fact the $10 million he will get out of the deal, is more than enough for him to seal the deal. He could in his old age go and do something new. By sticking with Mentor he is not going to make the millions. This could be Whally’s exit strategy from the mundane day to day activities in the EDA industry.
Notice that there is no mention of board or PCB design. For the board-level design it would be a failure because of the Cadence and Mentor product lines overlap.
If the takeover by Cadence is eventually accepted, it will bring some uncertainty and confusion to
Mentor Expedition, Board-Station, Pads and Cadence Allegro and Orcad users.
Normally a combination of development and acquisitions take years (reorganizing the companies, selecting the right products and re-packaging them). This means that a lot of resources will be put into barrier between the products and interfaces, but no further R&D in functionality or innovation.
Meanwhile, customers will face a lot of difficulty having their problems resolved.
It’s just a matter of time before products will be replaced and Cadence & Mentor customers begin to make some forward-thinking, looking for new solutions to work with as their design requirements evolved.
Cadence and Mentor products are sold through a reseller network. I can only imagine the insecure they must be feeling these days.
It reminds me the pain experienced when Cadence acquired OrCAd.
Re. Cadence Makes Error in Bid to Acquire Mentor
Since both Cadence and Mentor focus is on ASIC and IC design solutions, this acquisition would create a leading position for Cadence at the IC design level in the market, and joint resources would makes sense.
The question is would the PCB design customers be served by the acquisition (should it eventually accepted)?
Since both companies have tools that extremely overlap in the PCB design area, joint resources would not make sense and would be a failure.
Shortly after Cadence will take over, many of the development team will be disbanded – that will be the ‘easy’ part. Yet, consolidating the products and re-packaging them will take a significant number of months as its more complicated and a time consuming task. This means that a lot of resources will be put into barrier and interfaces between the products, but no further R&D in terms of functionality or innovation. Meanwhile, customers of both companies will face a lot of difficulty having their problems unresolved.
It’s just a matter of time before products will be replaced. Still the question remains what products will be selected and what kind of migration the customers will have to go through.
No question however about Mentor Expedition, Board-Station, Pads, Cadence Allegro and Orcad users who will be left with uncertainty and confusion. As their design requirements evolved, they will start making some forward thinking and look for new solutions to work with.
Mentor products also sold through a reseller network. I can only imagine the insecure they must be feeling these days.
It reminds me the pain experienced when Cadence acquired OrCAd.
Cadence Design Systems Inc. has been hit especially hard in the past six months. Although president and CEO Michael Fister has tried to energize the company through acquisitions.
Fister, might not be able to close the deal but even if Cadence successfully completes the transaction, it might eventually be judged a mistake if integration proved problematic and if the company failed to secure the expected benefits.
Big EDA players make virtually no efforts in communicating their value to their customers, nor do they make any real effort to hear what their customers want. They should recognize that technological breakthrough mainly coming from innovative startups. If they deliver significant value to their customers, the customers will ensure the long-term growth of their company.
Some of the comments may appeal too emotional. Perhaps there shouldn’t be much space for emotion, though, in the corporate world where success or failure is often determined by numbers and cold-calculations, customers should look for ways to benefit from this event.
Any significant move like this creates opportunities, especially for young startups. Without knowing whether this will close or not, the market has already responded.
I believe it will happen,…and the outcome will be;
Allegro will replace BS and Expedition.
PADS will replace the now defunct Orcad Layout.
DxDesigner will translate seamlessly to Orcad Capture,…no more Mentor schematic entry tools. (which was never liked by most engineers anyway,…and neither was Cadences’ Concept)
The Mentor customer base will be migrated to Cadence with a deal they “can’t refuse”.
Massive Mentor workforce reductions, sans PADS, will pay off the debt in 2-3 years.
High end PCB designers, FPGA designers and engineers will now have common tools to master when seeking employment,..instead of 2 or 3 different flavors that do the same thing.
Archiving databases and maintaining compatibility with customers and separate divisions within these corporations into the future will be easier and more viable.
Customer base will be larger, and resellers and sales reps will gross more, as will the company itself (Cadence), and lower operating costs & larger customer base can easily be double for even more profitability by lowering prices and maintenance fees across the board.
And last,…it’s the capitalistic thing to do.
Fed,
I don’t thinnk that this deal will happen because of financial problems at Cadence. Look at the article today on Reuters about how difficult it is for Cadence to borrow so much money.
http://www.reuters.com/article/marketsNews/idINN1448526920080814?rpc=44
Daniel