Today is a busy day for financial analysts that follow the EDA industry. First Cadence made the news with its announcement of its offering of $300 million of Convertible Senior Notes, and then Synopsys announced a definitive agreement to purchase Virage Logic.

Synopsys

During the webcast that followed the announcement, Aart de Geus stressed that the acquisition was motivated by the need to focus on computational capability and design re-use in order to improve Synopsys position in the System market. He did state that Virage Logic portfolio of embedded memories (both SRAM and NVM) was a key factor in the decision to acquire the company. In fact later on he did not exclude, and from some listeners point of view in fact confirmed, that not all of the standard cell libraries and configurable cores for audio and video sub-systems components in Virage's inventory will survive the integration into the DesignWare line.

For sure the die continues to be Synopsys focus. Aart spoke of the need to be connected well to the silicon. This has been the principal motivator of Synopsys growth and strategic choices during the entire existence of the company. Given its success so far it is hard to question it. Yet, I have my doubts.

I found it interesting that during the webcast, Aart spent time making a difference between the service business and the support business. This is a problem EDA companies have struggled with has they try to expand their presence in the IP market while avoiding what they perceive to be "competing with our customers". The problem is that if the "service" and "support" business is seen only as necessary to facilitate and support the sale of EDA tools, then the results are not very profitable and hard to predict.

Cadence

The Cadence transaction is actually easy to explain. It is really a re-financing of existing debt obligations that were coming due in 2011 and 2013. The company will pay a higher interest rate for the new notes, although the 2.625% yearly rate is quite low. The conversion price is set at $7.55 per share reflecting what I think is the company belief that its shares are undervalued in today's market.

The price of Cadence's stock is still suffering from the company's need to extricate itself from the financial problems resulting from its previous unjustified expansion that resulted in a drastic change in the executive team over a year ago. As I write this column, its stock is down a few cents, probably due to the uncertainty in the market regarding the impact that the Synopsys acquisition will have on Cadence.

What Does It All Mean

When the acquisitions by Synopsys of Virage Logic and by Cadence of Denali are taken into consideration and contrasted, some points require analysis.

Both companies are spending approximately the same amount of money, meaning that the valuation of resulting additional revenues is consistent between the two. Synopsys net investment is about $30 million higher but the integration of some of Virage's products into its own revenue stream is more immediate than in the case of Cadence.

There remains an open question regarding the cost of integrating Virage's employees into Synopsys, since it is clear that there are redundancies that will have to be handled, as well as retention issues that will need to be addressed, especially in the embedded memories space.

When it comes to Cadence's acquisition of Denali, the transaction places Cadence in new markets that was not serving before, while Synopsys is expanding into embedded memories but is also acquiring IP cores for markets they already serve. Cadence is also acquiring a much stronger revenue base, it is expanding not just the IP portfolio, but also the verification portfolio and its technology. If the company is successful in retaining a few key contributors from Denali, at least for a couple of years, Cadence will be a much stronger company. In my opinion, instead, Synopsys is adding to its portfolio, not to its technology.

But these are tactical consideration. What is the strategic vision? Aart provided an answer: silicon is king and Synopsys wants to strengthen its position as the primary provider of tools for moving designs into silicon in the most cost efficient manner. The Cadence story, contained in its EDA360 document, is less familiar to the EDA industry. All EDA companies understand the need to transform a design into a silicon implementation, very few understand that silicon is just a vehicle at this point, and that software, or firmware to be more precise, is the differentiator in the vast majority of IC products.

If a company wants to increase its presence in the IP space it needs to pick the right target. I do not think that silicon at any process node is that target. The target must be either a software environment, or a functional market like automotive, medical, or industrial control, for example.

There is a point when an EDA company's revenues from IP and services sales can grow so much to force it to behave as a fabless foundry. Is this a good thing? Can this business model co-exist with the one focused on selling design tools? I believe that yes it is a good thing, and one that EDA companies should take into serious consideration. As for the second, this is really an issue of corporate structure. How one business can be synergistic with the other is a question that does not have a generic answer, but I do not think it generates insurmountable obstacles.

The goal of an EDA company must be to provide as many tools and services to its customers to increase the determinism of design projects, regardless of the components required by the project. So, if a company can provide all of the hardware, software, and tools required to shorten time to market and decrease development costs, that company will be a very successful one. It will be seen as a real partner and capable to generate revenues not just during the development phase of a product, but also during the market life of the product in the form of fees tied to the financial success of the product.

What will Mentor do? Increasing the price of the stock seems to be the desire of at least some of its investors (Carl Icahn for one). Increasing profit margins by cutting costs, or by penetrating new markets? It all depends on the time frame. It is quicker to cut costs, but generally at the expense of future growth. Or maybe it is time to grow revenue through an acquisition?

Should Apache take advantage of the increase attention the financial markets are giving to EDA to organize an IPO? May be Springsoft would increase its presence in the verification space by acquiring EVE?
May be next week at DAC some of these questions will be answered.