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Opinion: Cadence loses 'glory' in expanded markets

Posted: 20 Oct 2008 ?? ?Print Version ?Bookmark and Share

Keywords:EDA? manufacturing? semiconductor?

The road to hell may have good intentions. Cadence Design Systems will find out how close it has led to corporate dysfunction. It all began with what was a good idea at the time. The premise was that the market was up for change and that attracting someone from outside of the close-knit EDA community would bring a different and thus more profitable strategy to the business. Who was better than someone who was in a senior executive position at the top IC firm in the world? This is how Michael Fister became Cadence's CEO.

The announcement came just before the 2004 Design Automation Conference (DAC), even if to be precise, he did not assume the position of president and CEO until August 2004. I still remember the dismissive comments from both EDA officials and analysts about this "outsider" that would soon find out the "EDA reality."

It must be noted that during his career at Cadence, Fister did try different things, and succeeded to raise Cadence's profits from around $49 million in 2005 to $296 million in 2007. In the process, Cadence surpassed Synopsys Inc. in sales to build itself as the largest EDA company. So, a Wall Street analyst consumed with short-term returns had to like Fister.

The basic misconception
Every observer of the EDA industry knows that IC design has been the major historical source of revenue, more importantly of profit. Most observers will agree that the fuel to this engine has been the increasing deployment of new manufacturing technology by IC companies. Gordon Moore predicted that the number of transistors in a given silicon area would double every 18 months and this became into a law in the late 1960s. This was later used to justify the most significant industrial progress in the last 43 years.

As semiconductor personnel, who had seen the microprocessor as the most important component in world wide progress, Fister continued to exploit Cadence involvement in this market, not seeing, as he should have, the coming collaboration in the IC design and manufacturing business. By 2007, Synopsys, Mentor Graphics, Magma Design Automation and Cadence were competing for the business of about 24 customers with budgets above $100 million annually. Things got worse this year, as many companies decided to skip full production at 65nm and shift directly from 90nm to 45nm.

The future is no longer promising. The number of companies seriously interested in 35nm and 22nm fabrication technologies has downsized, not larger. The time between moving from one manufacturing technology to the next is increasing, to the point that the anticipation that 22nm will be available by 2011 is uncertain than it was six months ago.

However, Cadence is suffering from no expansion in its markets in areas that have not been traditional EDA markets like system level design and design automation segments closely related to electronics. But it is worse than that. The most rapidly growing segment of EDA is the employment of FPGA in design and yet Cadence plays a small role in this market segment.

Not-so-good approach
Cadence made a few wrong turns on its way to becoming different. It believed that behaving differently was the same as being different. Following the Intel model, Fister decided that Cadence was huge enough to develop and exist in its own reality, on the assumption that if the largest EDA company ignored traditional EDA events and organizations, they would wither away into irrelevance. At the same time, this approach would eliminate direct comparisons between Cadence and its competitors. So Cadence lowered its involvement in EDAC, ended exhibiting at DAC and other industry conferences, narrowly managed its press relations, and built a monument to itself: CDNLive!

The differences between Intel and Cadence are so stark and Fister is guilty of being unable to understand them, internalize their meaning, and build a strategy rooted on useful nuances borrowed from the IC giant. Let's stick with the obvious. Intel has superior engineering, marketing and manufacturing capacities than its one rival Advance Micro Devices Inc. (AMD). Before I get flamed, I admit that for short periods, AMD has succeeded to equal and even surpass Intel in engineering results, but one has to make and sell its great products for the largest margin possible, and this AMD has not done.

Cadence vs. Intel
Cadence is not Intel. The company has three large competitors, who can match and often surpass Cadence technology. Its products are very price-sensitive, customers are capable of negotiating a better price and the time on hand to wait for the end of the quarter, and does not hold a position of strength in all the phases of IC design, from conceptualization to manufacturing and testing.

What went wrong
There are conflicting reports as to whose idea it was to attempt to buy Mentor. Some say it was Fister's idea, some say that Cadence's Board of Directors ordered him to "get it done." In either case, the execution was a sequence of errors that will become a business school case study.

No one seems to dispute that Cadence approached Mentor with the offer sounding like they were doing Mentor the favor of offering a good deal since obviously Mentor had no better options. It may not have been a "take it or die" offer, but it certainly looked that way. Then there was that contradictory financial situation. The deal, Cadence said, was not dependent on it receiving financing, yet without the financing, Cadence could not afford the deal.

Finally, all my sources tell me that there was no discussion between Fister and Walden Rhines, chairman and CEO, Cadence, as what will be the fate of Mentor's executive team after the acquisition. Given these premises, the result was predictable. I agree that the unraveling of the financial markets and the softening of the EDA industry did play a role: timing could not have been worse. Cadence financial results were well below expectations, the credit markets dried up, and the company saw itself faced with having to raise the offer without having any way to pay for it.

The sudden downfall
When things go wrong, culprits are needed. Fister and the team of executives he brought from Intel are the obvious candidates. It is unfortunately not clear that their immediate replacements are any more qualified to lead an EDA company, so the search for a new CEO must be short and furious before the ship drifts so much off course to enter the EDA equivalent of the Bermuda Triangle. The trickle down phenomenon will take place. There will be one or more reorganizations, and will have one or more layoffs necessary for the "refocusing" demanded by the new executive team, and there will be further deterioration of financial results for Cadence as its major customers will wait to see what the new reorganization will look like before committing to significant purchases. Expect very strong attempts by Magma, Mentor and Synopsys to make significant inroads in the Cadence customers' base.

The EDA industry needs fresh ideas and a new approach: it did not and does not need a sartorial makeover.

- Gabe Moretti
EE Times





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