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Cadence LBO?

Posted on Monday, Jun 11th 2007

Does naivete rule, when investors send Cadence shares up to a 52-week high on the rumors of a buy-out? The truth is, a Private Equity player buying Cadence doesn’t make a hell of a lot of sense, since the company has a very slow growth rate due to the industry’s normal behavior patterns. It has been reasonably well-managed within its constraints, and cannot be split up due to the integrated nature of its design platform.

I have said this before, but will say it again: the buy-out target in EDA is Mentor Graphics, not Cadence. It can be split up. In fact, it should be chopped up and sold in parts. They have a GREAT DFM piece that both Cadence and Synopsys would pay a premium to get their hands on. Synopsys would also buy their PCB business (Cadence already has one of these), especially with increasing emphasis in chip consumption by the Automotive industry, Mentor’s PCB business is a very good asset. On the other hand, Mentor’s IC Design tools lag behind the rest, and are nothing to write home about.

In terms of the destiny of Cadence, it ties intricately with the Future of EDA question. DFM is one of their identified growth areas. Here, they might consider a merger with TSMC. As it becomes increasingly complex to design manufacturable chips that are miniaturized to the limits, tighter integration with foundries are becoming critical.

I don’t see how a buy-out might help here, unless KKR is thinking about rolling up Cadence, TSMC, ARM and KLA Tencor into a significantly larger Semiconductor industry infrastructure play, which I think would inject some serious excitement into a stalling and vastly uninspiring industry, in terms of wealth creation. In would also create efficiencies that are truly valuable to the customers.

The semiconductor industry today is at about $280 Billion. It will go to a Trillion by 2020. Everything from cars to medical devices have numerous chips in them. However, for EDA, this doesn’t translate into an automatic growth curve. EDA depends on unique design starts, not chip volume. Design starts are dropping, even as chip volume ramps up exponentially. In the future, smaller number of highly complex chips will likely drive the industry, shrinking the room for EDA’s growth.

Vertical integration may be a very good solution, and if KKR has enough vision to pull this off, then more power to them!

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