December 5, 2011 – Synopsys is pitching a $507M takeover of Magma Design Automation, a proposed combination of EDA rivals that has industry watchers wondering what the next move might be.
Under terms of the deal, Synopsys’ offer is for $507M in cash/debt ($7.35/share, a 29% premium when announced Nov. 30 but now barely 2% as investors rallied the stock). The deal needs to be approved by Magma stockholders as well as US regulators, but is expected to close by calendar 2Q12. There’s also "a standard breakup fee of 3.25%," called which works out to about $17M in this case, and $30M reverse-breakup fee, according to Synopsys CFO Brian Beattie, during the company’s 4Q11 conference call.
(In a sign of the times, no fewer than a baker’s dozen "investigations" have been launched by law firms seeking shareholder traction to go after Magma, accusing it of failing to find or even pursue a good-enough deal. One of them is the delightfully named NYC class-action-starter "Bull, Lifshitz" — we’re not even kidding.)
Synopsys CEO Aart de Geus partly addressed the M&A in the company’s 4Q11 conference call (Magma called off its fiscal 2Q12 call), downplaying concerns about overlap (technologies, platforms, markets, customers) by pointing to what he called "a tremendous acceleration of technology demand" over the past year or more, particularly in areas targeting mobile devices. Keeping up with what end-users demand "will require substantial R&D investment and also substantial technical support," he said, so "there’s no question that we will be able to jointly much better support the customer." With regard to any antitrust concerns (essentially this combines two of EDA’s four major players), he seemed unconcerned, calling the EDA sector "an extremely competitive landscape with actually many more players." Specifically, place/route is "extremely competitive" with multiple players each offering multiple systems, he added; this tends toward specialization in both product (e.g. block route or top-level routing) and end markets — so "there’s really a plethora of technology," he said.
In general the deal seems to benefit Synopsys more than Magma. de Geus de Geus provided few insights about specific strategies of a combined Synopsys-Magma, but he did point to custom analog/mixed-signal, where design has not kept up with increased productivity, and is "harassed by the physics of small dimensions in a fashion that’s actually tougher" than design on the digital side. He later added that the two companies’ analog areas are "highly complementary," and declared that "the capabilities that the companies offer [can] be leveraged in many different ways and, actually, are badly needed in the market, frankly." With regard to platform integration or overlap, the emphasis really is on what customers need due to speed and volume of requests, and less thinking in terms of separate product "roadmaps," he said.
Magma "fills in a lot of holes that have appeared in the Synopsys tool set over the last five years," noted EDA guru Gary Smith. Both companies launched analog/custom tools a few years ago, and Magma’s seen more success in that area. Magma also has a competitive DRC engine which Synopsys doesn’t, he added, and (perhaps most importantly) Magma is picking up business from Synopsys in SPICE simulation, ASIC layout, and static timing analysis he said. While Synopsys has stressed tool integration, Magma is the one who’s achieved it, he said.
Static timing customers might be concerned, Smith believes, since this deal (added to the Extreme DA acquisition in October) gives Synopsys a "franchise position" in that market.
One key piece of this M&A puzzle remains missing, something that’s often included in such deals — the anticipated transition, integration, and structure of combining workforces — particularly top execs. Neither company offered any official details, explaining that nothing can be laid out until after the deal is closed. The highly competitive EDA sector has seen its share of M&As accomplished and attempted (with varying anchor in reality: Cadence-Mentor circa 2008, anyone?). In such a close-knit market companies can be driven (and identified) by their top execs’ personalities, and that includes conflicts between rivals. One wonders, then, what will become of Magma CEO/cofounder Rajeev Madhavan and his top lieutenants. Smith suggests there’s "little chance Rajeev will stay," more likely taking an exit with a noncompete clause, while maybe Roy Jewell is kept around.
More importantly is whether the two cultures can be meshed together, especially R&D. "Who goes and who stays in R&D will determine whether or not the merger will work," Smith says. "Magma brags that they can achieve better results with a five man team than Synopsys can with a fifty man team, and recently have been proving their point" — an attitude that doesn’t go over well within the Synopsys camp, he notes. "Trying to merge these two teams will be the major challenge […] if this merger is run by emotion, rather than performance, it will fall apart." In fact, he’s laying down 50/50 odds that this Synopsys-Magma M&A will ultimately fail — he thinks within five years Synopsys will be "pretty much back where they were before the merger," perhaps competing with ex-Magma engineers.