The last one-year has been tough, especially for hi-tech segments like electronic design automation (EDA) that operate in a small market. In the first quarter of 2002, the total revenue for EDA products and services decreased by 3% to $962 million, compared with 9% and 1% increases respectively in the third and fourth quarter of 2001, according to a survey by EDAC, an EDA industry association. In the midst of all this, the industry has also been witnessing a series of mergers and acquisitions. The three industry giants— Cadence, Synopsys, and Mentor Graphics— have just completed, or are in the process of completing, significant consolidation deals.

Says Richard J Decker, vice-president, Mentor Graphics, "This is the best time to acquire as the market is at its lowest ebb. We are getting some of the best bargains and we are trying to cash in on the opportunity." Mentor has already acquired three companies in the last 12 months and is looking for more. Innoveda, which was bought at $170 million, brings with it tools for printed circuit board design, a broader task than the design of the individual chips. The acquisition of verification and emulation tools vendor IKOS Systems for $11 per share, or roughly $106 million, will firmly establish Mentor in the emulation tools market.

Similarly, in April this year, EDA bigwig Cadence acquired system-on-a-chip verification tools vendor Simplex Systems for about $300 million, or $18 per share. The same day, Cadence also announced the acquisition of privately held Plato Design Systems, a place-and-route tools company. These deals look like a response to the decision by Synopsys to acquire troubled Avanti for about $737 million, which is one of the larger deals witnessed in EDA history.

The implications
While the EDA market is small in terms of size, the tools deployed for development could be extremely hi-tech and expensive. Without acquiring smaller, more agile startups, the big three EDA vendors would see themselves falling behind the innovation curve.

Cadence, for instance, was interested in Simplex and Plato because of their deep sub-micron design and verification tools and services for system-on-a-chip (SoC) development. Synopsys was interested in Avanti for much the same reason. Mentor’s Innoveda is intended to build on the company’s existing board-level design business, which like the chips themselves continues to grow in complexity.

"When two companies merge, you get one common sales channel and better margins," explains Decker. Mentor Graphics, for instance, has 71 offices worldwide and 28 development centers. This would obviously be beneficial for IKOS, which had only three development centers and a much smaller market share. "By joining hands with them, we have access to so many more locations, which we did not have earlier," says Jyotirmoy Daw, President, IKOS India, now a part of Mentor.

However, these mergers also throw up a number of challenges. The biggest challenge is to bring about a synergy between the two product lines, as there could be a number of overlapping areas. Which products to retain and how to deal with the rest, how to sort out the cultural differences and retain the key R&D talent… a number of such questions come up. While the customers are left wondering about the long-term implications, employees are worried about their jobs, which could be at stake.

Most of these companies, for instance, have large development centers in India and they are trying to work out the logistics. In the case of Mentor and IKOS, says Decker, they would prefer to run the two development centers separately than deal with the problems of merging the two. "We are doing a lot of work in India and we would not want to lose on our existing R&D expertise. "In this way we can tap more talent from India, which has been known for its skills in software engineering," he insists. The EDA software market may not be huge in terms of size but the frenetic activity that is being witnessed marks a significant trend that may have long-term implications.

Shweta Verma in New Delhi