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Watch Out, Cadence! The Hunter May Become the Hunted

The problem with hostile take-over attempts is that they expose the aggressor to (perhaps) unwanted attention. I’ll explain the “perhaps? emphasis shortly. But first, consider this scenario which was shared with me by a friend on the financial side of this misadventure.

Cadence is trying to forcibly acquire Mentor. Others are debating whether the move is based on business strategy – namely, to acquire Mentor’s very profitable Calibre tool product line – or to distract Cadence’s investors from recent disappointing earnings. Regardless, the takeover bid has exposed Cadence’s financial position to the larger investment and corporate world.

Some big players in the investment market are now wondering if a bigger fish, like AutoDesk or Dassault Systèmes, will make a play for Cadence. Here’s the reasoning: Cadence had to show their hand in order to make the bid for Mentor. While strong in some regards, Cadence’s financial position is not as firm as many might think. From a financial standpoint, they are under-performing. Twice this year they have pulled back their estimates and are currently revising their guidance for the rest of the year. Perhaps most telling was that Cadence seemed to lack enough of their own cash reserves to secure the $1.6B take-over price offered to Mentor. Apparently, the company is floating $1.1B of the $1.6B by way of a bond aimed at off-shore investors. If true, that means that Cadence is using only $500m of its own money for the takeover.

Now, $500 million is still a nice chunk of walking-around money. Plus Cadence has a reasonably healthy client base. The cash flow needs some help, but that can be improved – in the short term by a take-over of Mentor. All of these factors are catching the attention of several big multinational firms, like AutoDesk and Dassault Systèmes. The big ERP companies – such as SAP or Oracle – are less likely to be interested in EDA companies like Cadence since they already make a mint from the semiconductor fab side of the market.

An acquisition of Cadence by AutoDesk – makers of AutoCAD – does make sense. Cadence makes several good point tools that would complement AutoCAD’s existing product engines, e.g., in the aircraft, automotive and multimedia markets. AutoCAD has all the 3D modeling, rendering and packaging tools that are coveted by the major EDA companies. AutoCAD is truly a big fish with around $4 ½ B in sales and a market cap of $9B. This makes AutoCAD roughly four times the size of Cadence. So an acquisition of Cadence makes both technical and financial sense.

As I wrote before: This summer promises to be a “fun? time for the usually quiet world of EDA tools! Watch out Cadence.

8 Responses to “Watch Out, Cadence! The Hunter May Become the Hunted”

  1. S. Thompson Says:

    Please note that AutoCAD is a product. AutoDesk is the company that makes the product. You should fix this in the article.

    thanks

  2. John Blyler Says:

    what an obvious mistake!? guess it comes from too many years as an engineer using AutoCAD. appreciate the comment and will change. thx.

  3. John Blyler Says:

    Here’s a more business directed write-up by Aliza Earnshaw from the Portland Business Journal: Mentor bid could be defensive play for Cadence

  4. Daniel Payne Says:

    John,

    Interesting perspective about AutoDesk buying Cadence. I know that AutoDesk talked with Flomerics but then didn’t buy them as a White Knight against Mentor.

    In my view AutoDesk has products sold at much lower ASPs than EDA, so they wouldn’t know what to do with the huge direct sales force at Cadence.

    Think of the sales mismatch between Cadence and OrCAD products.

    Daniel

  5. John Blyler Says:

    Hi Daniel. Actually, I forgotten about the OrCAD days. You’re right; It would be very instructive to remember the Cadence-OrCAD integration challenges.

    Nevertheless, I have found that sales force mismatches are almost never a concern in these acquisitions. Look at all the hardware firms that thought they could acquire software companies and maintain the sales in both areas – like GenRad locally? Of course, such acquisitions almost always failed. But they still went through.

  6. JB’s Circuit » Cadence drops bid for Mentor – and the financial market yawns Says:

    [...] What does it mean for the future of EDA? Cadence’s withdrawal of the bid for Mentor was due to misleading accounting practices and poor timing than anything else. But I think the event will mark the last time one of the big three tries to take over one another. It’s more likely that an outside player will acquire one of the big three. (see previous blog) [...]

  7. JB’s Circuit » Cadence - From Hunter to Haunted Says:

    [...] as if my summer blog was mistitled: Watch out Cadence – The Hunter may become the Hunted. Back then, Cadence was trying to take-over Mentor. Now, judging from the drop in stock and [...]

  8. JB's Circuit » What does Carl Icahn really want from Mentor? Says:

    [...] Watch Out, Cadence! The Hunter May Become the Hunted [...]

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