Gary Smith wrote a short but insightful piece on the decision by Cadence to leave the DFM market. (http://www.garysmitheda.com/note-Cadence-layoff.html). The bottom line of Gary's analysis is that the decision is a strategic mistake. My question is: is it really an oversight?

The scenario proposed by Gary is accurate, and no one can successfully refute it. Without DFM technology, results of IC layout beyond 65 nm are not competitive, and in some cases impossible to achieve. I cannot believe that no one at Cadence understands this. Not with Alberto Sangiovanni Vincentelli on the Board! So, what brought about the decision?

The undeniable imperative was cut present costs. This is a bitter pill but it must be taken, or the company will suffer serious financial consequences in its ability to maintain a workable line of credit.

Looking at the portfolio of products Cadence has, and using Gary Smith's industry wide market analysis, one can identify DFM as a small market segment. Thus revenue directly associated with DFM by Cadence, given, as Gary shows, that Mentor and Synopsys control the largest share of that market, can be safely projected to be small, and may be even less than what the company spends for it. So, the obvious accounting decision is to cut loosing operations, like DFM. This is easy to explain to the financial guys you need to borrow money from.

But doing this means that soon, in fact almost immediately, Cadence's back end products, which count for a significant portion of its revenue, will be first deemed and later become uncompetitive. This seems like a vicious circle that Cadence's executives have understood, especially if, it bears repeating, they have taken the time to listen to Alberto Sangiovanni Vincentelli. Thus there must be a solution in hand.

The financial system is motivated by short term factors. So non-GAAP results are more important than full accounting, since they are a popular measure of how a company is managed. Investment costs are not part of the non-GAAP accounting system. The answer thus seems obvious. Quit spending for DFM, instead buy DFM. There just happens to be a company with very good DFM technology and not enough resources to market it to the extent it deserves. This company has a market capitalization as of June 16th of $67.4 million and 46.8 million of outstanding shares. To obtain control of this company on the open market would mean purchasing, at most, one third of the outstanding shares. This amounts to a bit more than 14 million shares for a total expenditure of approximately $21 million. Given that there will be a price inflation once the purchasing begins (the average volume is only 271,000 shares) lets say that it would cost $30 million. Is it a coincidence that the June 10 press release from Cadence stated that the cost cutting moves would save approximately $30 million?