Cadence: What's going on behind the scenes?

by Anonymous Observer

First a declaimer: I do not know much more than anybody else who is closely following the news about Cadence, so the scenario I'm describing here might be complete rubbish, but it also puts all the puzzle pieces together, so maybe there is a grain of truth in the following text.

The last few weeks have been very turbulent for Cadence Design Systems: the stock prize fell twice as fast as NASDAQ, the stock lost 85% off of its 52-week high; the CEO and four top manager had to leave the company; there is an interim-CEO from Board of Directors; a new CEO is not in sight; and on top of all this mess there seems to be a can of worms hidden in financial statements, which was opened just before the release of the third quarter results. It is not clear now when the results will be released. The only thing that is clear is that the numbers will not be overwhelming. Now a big layoff has been announced.

The analysts have downgraded the share price, and various lawyers are asking the shareholders if they want to participate in an investigation, which could result in a court case against Cadence for allegedly providing incorrect information about their financial status. Did anybody say “Enron“?

All of Cadence's actions so far have generated more questions than answers. It is understandable that Michael Fister had to go because of the failed merger between Cadence and Mentor and the miserable stock price, but what about the others? Neither Bill Porter, nor Kevin Bushby belong to the Intel gang, which Fister installed at Cadence. Maybe they had to go because both of them were strong enough to become the next Cadence CEO, and this had to be prevented at all costs. Meanwhile, the new Interim-CEO does not give the impression that he is very serious in searching for a new CEO in the next few weeks. He seems to imply it might take a month or two, or even half a year to fill the CEO position.

Extrapolate the Cadence share price for the next 6 month for a company without a clear strategy and strong leadership, and we might see Cadence become a penny stock! The Board of Directors must understand that.

The next strange thing is the layoffs, which may result in discontinuation of whole product lines. But how is this possible, given all of the long-term contracts with the customers? Cadence still has the obligation to maintain completely outdated software like Diva, Dracula, and Chameleon, because the customers want that and they pay big money for those licenses and support.

If Cadence discontinues one of its current products, even if it is not popular, it breaks the RTL-GDSII flow or leaves a big hole in analog design software chain, which will be immediately filled by the competition. The competition is already able (or will be able soon) to deliver the whole software stack for the RTL->GDS flow. And, with the introduction of SAAS-business it makes no sense for Cadence to integrate any competitor software in the offering. That all means that the layoffs must happen somewhere else, but not in R&D. Is that what we are seeing?

Finally, the postponement of publishing the third quarter results because of incorrectly booking $24 million in the first quarter looks like a very lame excuse to me. The press statement said this revenue was recognized according to the old rate system, which was perfectly valid, because in the first quarter the old rate system was the correct one. Now this revenue has to be rebooked according to the new rate system, but this does not affect the third quarter. But why could the results of the third quarter not be released? Lip-Bu Tan, who is an experienced venture capitalist, should have known that a message like this would cause an earthquake on Cadence share price. But maybe this is also part of the deal?

So, let’s summarize: no CEO, stock price has collapsed, no strategy, and huge layoffs. Does it make any sense?


Prepping the company to be sold ...

If you read my article predicting the buyout of independent EDA-companies by large foundries, you will see that all of the steps I have mentioned in this article are preparing for Cadence to be bought by a foundry -- suddenly the picture becomes clear:

* There is no need for a strong man on top of Cadence or a strategy, if the company becomes part of a foundry.

* The stock price must be kept low, so it will be cheaper for a foundry to buy Cadence. The current shareholders will get stock from the foundry, which is much more attractive than waiting for the value of Cadence stock to rise again.

* After a buyout, there will no need in sales or marketing, but R&D will remain important.

* Consider also that Lip-Bu Tan is the right person for such a deal. He is board member of SMIC and has great connections to other foundries. He is not a technology guy, like Michael Fister used to say. Instead, Lip-Bu Tan is a successful venture capitalist and has lot of experience in this area.

* The latest news about Cadence says that R&D will be split into front-end and back-end technologies. That means that only the back-end part will be bought, while the front-end part might stay independent.

The only question then, if these assumptions are correct, is which foundry will buy Cadence?

I doubt it will be TSMC, because of the good relationship between TSMC and Mentor, which would be immediately destroyed by such move. I also doubt that SMIC will be the buyer, even if there are connections through the interim-CEO. SMIC is simply not big enough. IBM is a hotter candidate, but they have their own software already. On the other hand, the Common Platform initiative needs software which they could provide to their customers; IBM does not release ChipBench and Booledozer into the wild. So, one of several Japanese companies or UMC could emerge as potential buyers.

Whatever happens, I think Cadence is being prepared for a sale. Pay attention because we will know the answer very soon.

November 10, 2008


The author of this article is an independent observer of the EDA Industry who wishes to remain anonymous at this time.


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