Cadence Design Systems, Inc. - Company Profile, Information, Business Description, History, Background Information on Cadence Design Systems, Inc.

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History of Cadence Design Systems, Inc.

Cadence Design Systems, Inc. is the world's leading developer of electronic design automation (EDA) software, maintaining a 18 percent market share in 1993. EDA software is a form of computer-aided design and engineering (CAD/CAE) software specifically geared towards automating the design of electronic systems and integrated circuits (ICs). Cadence Design's clients are companies that manufacture computer chips and circuits used in computer components, telecommunications equipment, television sets, video game systems, pagers, watches, fax machines, bar code scanning systems, and pacemakers, among other devices. Cadence's clients include IBM, Apple Computer, Motorola, Sharp Electronics, and Hitachi.

Computer-aided design of ICs was a rapidly growing field when Cadence started operations. As chip manufacturers tried to fit increasingly many tiny transistors on each chip, the complex layout of the chip's design and its verification came to depend on design automation software.

Cadence Design Systems Inc. was incorporated in June 1988 as the new company resulting from the merger of CAD software companies, ECAD Inc. and SDA Systems Inc. ECAD, based in Santa Clara, California, developed and sold CAD/CAE software to accelerate the design of ICs, including both the schematic design and the testing phases. The company's specialty was design-verification software, in which it was a technology leader. The company's largest clients were Digital Equipment, NCR, Data General, National Semiconductor, and Advanced Micro Devices.

ECAD was founded in August 1982 by Glen M. Antle, who held the posts of chairperson and chief executive officer until the SDA merger. Antle had worked on ICs and semiconductors since 1959 at Texas Instruments, ITT, Teledyne, and Data General. Until founding ECAD, Antle had headed the microelectronics products division of Systems Engineering Laboratories (SEL) in Sunnyvale, California. When SEL began developing a 32-bit computer, the company's CAD team devised an extremely fast algorithm for testing the new design. This new CAD testing technology would become the basis of ECAD's software products. In 1982, SEL was acquired by Gould Inc., and the Sunnyvale facility was shut down. Gould/SEL granted Antle the marketing rights to the CAD technology plus $25,000 in funding for the new software technology, in exchange for completing some unfinished work on an operating system on which Antle and his team were working. Thus, Antle incorporated his own company, ECAD Inc., and operations began in January 1983.

ECAD began selling its first CAD integrated software package, Dracula, in April 1983. Dracula was a set of programs for integrated-circuit layout verification, which ran many times faster than the software of its competition. The package included a design-rule checker, an electrical rule checker, and a layout-versus-schematic consistency checker among other programs. In April 1984, ECAD acquired Simon Software, which produced the Simon Simulator, the only circuit-simulation program on the market developed especially for the MOS (metal oxide semiconductor) technique of chip design. ECAD's second major product family, SYMBAD, provided the automation of layout design of ICs. In August 1987, ECAD entered the printed circuit board design and layout market with its acquisition of the product line of Omnicad Corp.

Unlike most other CAD companies, ECAD provided only software, and its software was designed in versions to run on different kinds of hardware. ECAD's software was made available for computers manufactured by IBM, Sun Microsystems, Apollo, Gould, Ridge, and Elxsi. ECAD also had original equipment manufacturer (OEM) contracts to sell its software as part of the CAD/CAE systems supplied by Daisy Systems, Control Data, and VIA systems.

ECAD had made a profit every year since 1983, and its sales and profits increased steadily. Its 1986, revenues were $16.59 million, and profits were $1.5 million. The following year, sales rose to $23.90 million, and profits more than doubled to $3.16 million. The company went public on June 10, 1987 with a sale of 1.5 million shares of common stock, raising $11.3 million in capital. Moreover, ECAD had begun marketing overseas, targeting Taiwan, Hong Kong, and western Europe. By 1987, the company had subsidiaries in France, West Germany, the United Kingdom, and Hong Kong; a research and development center in Taiwan; and a licensed distributor in Japan.

SDA Systems Inc., located in San Jose, California, developed and sold computer-aided engineering software for the physical design of semiconductor chips. SDA was founded in 1983 by James Solomon, a product manager at National Semiconductor Corp. Solomon started his own company, with National Semiconductor's support, in order to attract the specific engineering talent needed for developing design software.

SDA received start-up financing from National Semiconductor and General Electric Co., of $1.5 million each, by establishing special corporate sponsor/client partnerships with these companies. Similar sponsorship relationships were subsequently established with Harris Corp. and L. M. Ericsson Telephone Co., also yielding contributions of $1.5 million each. In April 1987, SDA signed similar technology partnerships with Toshiba Ltd. of Japan and SGS Corp. of Italy. These types of alliances yielded more financing for less equity than funding from venture capital firms, yet, unlike straight sales contracts, they also brought in up-front cash. Although they owned equity, none of the corporate sponsors had any direct control of SDA. SDA did not mind having to share its technology, because the close relationship with its clients helped the company provide better products to serve its clients' needs.

SDA's primary technological innovation was its design framework architecture, which permitted designers to link software tools from various vendors in a common user interface and database. In 1985, SDA was the first software company to commercially introduce such a framework product. Like ECAD, SDA also distinguished itself from its competitors at the time by providing versions of its software that could run on different computer hardware platforms, such as workstations from Sun Micrososytems, Digital Equipment, and Apollo Computer.

In 1984, 33-year-old Joseph B. Costello joined SDA as vice president of customer service. He held a number of positions, and in March of 1987 became SDA's president and chief operating officer. Costello had received an M.A. in physics from Yale University and had begun Ph.D studies at the University of California at Berkeley before becoming a research and development manager at National Semiconductor. Upon Costello's appointment, Solomon retained the posts of chairperson and chief executive.

In 1986, SDA had about $6 million in sales, which jumped to $18 million the following year, allowing the company to turn a profit. Having raised an additional $8.3 million in the sale of preferred stock, the company filed for initial public stock offering of 3.4 million shares at $7.50 to $9 per share in September 1987. However, the October 19, 1987 stock market collapse caused those plans to be canceled.

In February 1988, an agreement was reached for ECAD Inc. to acquire SDA Systems Inc. for a stock swap of $72 million. At the time, ECAD had 197 employees, and SDA had 161. The merger was completed on May 31, and a new company, Cadence Design Systems, Inc., was incorporated on June 1. Although Antle was originally to become co-chair and chief executive officer of the merged company, he did not stay after the merger. Similarly, ECAD's president and chief operating officer, James Hill, had resigned following the decision to merge in February. Thus, Costello became Cadence's chief executive officer as well as president. Costello was credited with helping to facilitate the merger through his communication efforts among all the employees.

For the year ending December 31, 1988, Cadence's sales were $78.61 million, net income was $15.96 million, and the company had 433 employees. In August 1989, Cadence raised $1.6 million in an additional stock offering, increasing the public share of Cadence's stock. Until that time, corporate sponsors of former SDA still owned sizable stakes in the company, such as Harris Corp. with ten percent.

Cadence continued its strategy of offering software for multiple computer platforms. In addition to versions for Sun Microsystems, Digital Equipment, and Apollo computers, Cadence began making software available for Hewlett-Packard, Sony, and NEC computers in 1989 and 1990. Meanwhile, its competitors, Mentor Graphics Corp., Daisy Systems Corp., and Valid Logic Systems Inc., continued to bundle software with computer hardware for turnkey systems. Software portability was already common for various applications, but it did not become common for CAD software until the early 1990s.

Cadence soon became the world's leading supplier of IC, or chip, design software. In 1989, Cadence had a 15.4 percent market share, ahead of Seiko Instrument and Electronics with 11.5 percent (mostly in Japan), and Mentor Graphics Corp. with 8.4 percent, according to the market research firm Dataquest Inc. A year later, Dataquest put Cadence's market share at 44.2 percent.

Cadence was able to hold the largest share of the international IC design software market by becoming a dominant supplier to the large Japanese market. In 1989, Japan was producing 40 percent of the world's semiconductors, and Cadence was serving nine of the top ten Japanese chip makers, earning 30 percent of its 1989 revenues from Japan. Cadence attained its success in the Japanese market in part by implementing its predecessor SDA's practice of partnering with firms instead of merely contracting distributors. In April 1989, a subsidiary, Cadence Design Systems K.K. was established in Tokyo. This subsidiary served as more than just a sales office by also handling marketing, finance, and research and development.

Cadence began implementing a new product strategy in 1989, expanding into systems design software, used for the overall design of an electronic product such as a computer, instead of merely IC chip design. This involved providing software that could handle mechanical design, computer-aided manufacturing, and documentation, among other tasks. Although Cadence was the leading chip CAD provider, the chip design market in 1989 was only $179 million, compared to the $880 million systems-design market, which was the largest component of the overall $1.05 billion EDA market. In 1989, the EDA software industry was growing at 25 percent annually. Costello aspired to make Cadence into the leading EDA company by 1992, up from fourth place in 1989, and was determined that the company would first have to become at least the second-largest supplier of system-design tools.

To this end, Cadence acquired three other CAD companies with complementary technologies. In March 1989, Cadence acquired Tangent Systems Corp., a subsidiary of Intergraph Inc. based in Santa Clara, California. Tangent supplied gate-array products, integrated circuit layout design software. In November 1989, Cadence acquired Gateway Design Automation Corp. of Lowell, Massachusetts. Gateway's strength was in simulation software, and the company's main product was the Verilog line of logical simulation software. In April 1990, Cadence acquired Automated Systems Inc., a supplier of printed circuit board design software and fabrication services located in Milwaukee, Wisconsin.

Cadence also invested heavily in research and development at the unusually high ratio of 21 percent of revenues, or $29 million, in 1989. To focus on the systems design market, the company formed new divisions devoted to systems design and analog design. Cadence introduced a full systems-design software package, Amadeus, in September 1990.

At the end of 1989, Cadence's sales had nearly doubled from $78.61 million in 1988 to $142.84 million, while net income jumped from $15.96 million to $27.78 million. Moreover the company's work force increased from 433 to 978 within the year. The following year, sales reached $231.4 million, and Cadence became the second leading EDA supplier, following Mentor Graphics Corp.

By late 1990, Cadence was developing CAD software based on a new systems-design methodology, which enabled designers to portray their ideas in a high-level hardware description language (HDL), instead of in gate-level engineering, in what was known as a "top-down" approach to systems design, the latest trend.

Cadence's Verilog-XL simulator software, that of acquired Gateway Design Automation, already used an HDL of its own. In May 1990, Cadence announced its intention to make the HDL of Verilog available in the public domain for custom and third-party software development. Cadence subsequently sponsored the formation of the Open Verilog International committee to oversee file compatibility with Verilog's HDL and to promote the adoption of Verilog HDL as a standard by the Institute of Electronics and Electrical Engineers. While Cadence gained some backers from among its competitors for Verilog HDL, others in the industry preferred the existing VHDL standard. In May 1992, Cadence called for the interoperability of Verilog HDL and VHDL. Finally, by 1993, Cadence introduced a product based on the VHDL industry standard, a simulator called Leapfrog.

In December 1991, Cadence acquired and merged with Valid Logic Systems Inc., the third-ranking EDA supplier, in exchange for $200 million in stock. Valid president and chief operating officer L. George Klaus was made executive vice-president and chief operating officer of Cadence, and Valid chairperson and CEO W. Douglas Hajjar became vice-chairperson. Valid was a developer of EDA software especially for electronic systems and printed circuit boards, and its product lines were merged into those of Cadence's over the course of 1992. Thus Cadence entered 1992 as the leading EDA supplier, surpassing Mentor Graphics, with a 24 percent market share.

Although Cadence's revenue was slightly higher in 1991 over 1990, the company recorded a net loss of $22.4 million, largely due to $49.9 in million restructuring costs and $1.7 in merger costs associated with the merger with Valid Logic Systems. In the months following the merger, ten percent of Cadence's employees were laid off in an effort to eliminate redundancies. Sales growth also slowed in the first half of 1991, due to a weaker economy.

In July 1993, Cadence acquired Comdisco Systems Inc., a subsidiary of Comdisco, Inc., for $13 million in stock. Comdisco Systems was the leader in design software for digital signal processing and communications applications, with an estimated 70 percent market share. Comdisco's technology had brought design to a higher level of abstraction than currently available. The company had pioneered system-level design in 1988 with the introduction of its signal processing worksystem. Cadence thus gained the leading position in the growing markets of block-diagram digital signal processing design tools and in network analysis tools. The unit was renamed the Alta Group in June 1994 with the acquisition of Redwood Design Automation.

After record revenue and profits in fourth quarter 1992, the company experienced a decline in revenue of 35 percent and an operating loss in first quarter 1993. Lower sales were attributed to a change in product strategy which confused customers and to poor economic conditions, especially in the Japanese market.

In response to the surprisingly lower sales, Cadence introduced a re-engineering plan in April 1993. This involved focusing on improving financial results, the hiring of new managers, including a new chief operating officer and a new chief financial officer, and the strengthening of international sales operations. The restructuring yielded immediate positive results, as revenues increased each quarter of 1993, and there were no operating losses in the succeeding quarters. The year still ended in a net loss of $12.78 million, due to $13.5 million in restructuring costs.

Lower revenues in 1993 were also seen as part of an industry trend confronting both of the larger EDA companies, Cadence and Mentor. In addition to financial losses, both companies also suffered defections of engineers and executives to start-up firms. A perception had emerged that the broad-line suppliers of EDA software were no longer on the cutting edge of technology in the fields of electronics systems design and high-level design automation. Furthermore, the EDA market had matured and was nearing saturation at the higher end, according to some industry observers.

One area in which Cadence did have an advantage over smaller start-ups was in its ability to provide a full array of support and consulting services. In 1991, Cadence formed a consulting services group as part of its new systems division. The group advised EDA users on selecting and developing tools for their design environments. In 1993, Cadence established its Spectrum Services consulting group, which soon began to be used by some of Cadence's largest software customers. Although income from sales of products declined in 1993, revenue from maintenance services increased by $23.9 million that year. In December 1993, Cadence sold its Automated Systems division, manufacturer of complex printed circuit boards, which the company had acquired in 1990.

By early 1994, Cadence already appeared on its way back to recovery after the slump in 1993. With sales of IC design software once again growing, sales of systems design also began to show life after falling from $100 million in 1990 between $35 and $40 million in 1993. Cadence's test equipment subsidiary, Integrated Measurement Systems Inc., was predicted to grow eight percent in 1994. The new consulting group, Spectrum Services, was forecast to grow 40 percent in 1994 and is eventually expected to comprise up to 50 percent of Cadence's overall business.

Principal Subsidiaries: Cadence Design Systems (Canada) Ltd.; Cadence Design Systems, S.A. (France); Cadence Design Systems GmbH (Germany); Cadence Design Systems Asia, Ltd. (Hong Kong); Cadence Design Systems (Israel) Ltd.; Cadence Design Systems S.r.l. (Italy); Cadence Design Systems K.K. (Japan); Integrated Measurement Systems Inc.

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Further Reference

Burrows, Peter, "Cadence Shoots for the Top," Electronic Business, October 29, 1990, pp. 36--40.Card, David, "SDA Says it's Not Just Another CAE Start-Up," Electronic Business, May 1, 1987, p. 124.Caruso, Denise, "Startup ECAD Thinks Big in CAD/CAE Marketplace," Dorsch, Jeff, "Surviving CAE Evolution," Electronic News, June 14, 1993, p. 1."ECAD to Buy SDA Systems in $72M Deal," Electronic News, February 29, 1988, pp. 1, 30.Goering, Richard, "Cadence Acquires Comdisco Systems," Electronic Engineering Times, July 12, 1993, p. 1.Hof, Robert D., "Sure, He's Wild and Crazy--Like a Fox," Business Week, October 30, 1989, p. 132.Holden, Daniel, "Cadence Snubs VHDL International, Pushes Verilog for ASIC Design," Electronic News, June 15, 1992, p. 13.Jones, Stephen, "High-Tech Firms ECAD and Impact Systems Seek Public Money," San Jose Business Journal, May 18, 1994, p. 6.Jones, Stephen, "SDA Systems Inks Alliances with a Japanese and Italian Firm," San Jose Business Journal, May 4, 1987, p. 13.Kerr, John, "Breaking into Japan: Small U.S. Companies Show How It's Done," Electronic Business, November 13, 1989, pp. 72--76.McLeod, Jonah, "Going the Distance with Mergers, Acquisitions," Electronics, December 1989, p. 86.McLeod, Jonah, "Why Cadence Is the Top Dog in the IC Design Pack," Electronics, June 1989, pp. 121--22.Ricciuti, Mike, "Cadence Design Systems Inc.," Datamation, June 15, 1992, p. 142.Stitt, Wendy, "And in This Corner ...: Cadence Design Systems Continues to Trade 'Friendly' Punches with Mentor Graphics," San Jose Business Journal, March 18, 1991, p. S12.Wiegner, Kathleen K., "The Hot Box Syndrome," Forbes, April 17, 1989, pp. 178--80.

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