DALLAS -- Will Cadence Design Systems and Mentor Graphics go the way of Calma and other dinosaurs of design automation? As "jurassics" frolic across the nation's movie screens, the pattern of CAE extinction will be palpable on the exhibit floor in the Dallas Convention Center this week with the convening of the 30th annual Design Automation Conference.

Ten years ago, Calma and other leading CAD vendors were being challenged by the upstarts of CAE, and they eventually fell to the startups collectively known as "DMV" (Daisy Systems, Mentor and Valid Logic Systems). A decade later, only Mentor has maintained its independence, and now there is a new wave of start-ups which are bidding to obsolete the CAE era with what they call electronic systems design automation (ESDA) or high-level design automation (HLDA).

Both Cadence and Mentor have been battered by declining revenues, financial losses, defections of engineering talent and executives and a growing perception that the broad-line suppliers must evolve to survive in the latest generation of electronic design automation. Mentor's revenues fell from $435 million in 1990 to $400 million in 1991 and $350 million in 1992, as its sales of workstation hardware have dwindled, and the company had net losses totaling $111 million in 1991 and 1992. Cadence shocked investors in Q1 by revealing systems design software sales had collapsed due to a strategic shift that confounded customers; some shareholders sued as the company posted a net loss of $16 million on a 22 percent drop in revenues to $79 million.

 Mentor has been seeking a new CEO to replace chairman and co-founder Thomas Bruggere for four months, taking longer than IBM to fill that top post. In recent years, Cadence lost talent to such start-ups as ACEO Technology, ArcSys and PiE Design Systems. Viewlogic Systems and Synopsys are bidding to challenge Cadence and Mentor as broad-line suppliers, with Viewlogic acquiring Vantage Analysis Systems, Quad Design Technology and an equity stake in Sunrise Test Systems (see CAE Software, page 11) in recent months and Synopsys buying Compiled Designs of Germany and technology from the now-defunct ExperTest.

"The history of established players making it to the next generation is very poor," said Douglas Fairbairn, president and CEO of Redwood Design Automation, one of the ESDA start-ups challenging Cadence and Mentor. Y. Eric Cho, vice president of marketing and sales for ArcSys, said he and his fellow founders left Cadence because the company "was getting too big; they try to do everything." ArcSys, which is taking on Cadence and other vendors in place-and-route software, is focused on "key, critical technologies," Dr. Cho said. "We do design of a whole system from a clean sheet of paper. We don't have to compromise to be compatible with an old-style architecture. And we work harder

Isadore Katz, vice president of marketing for the IC Design division of Cadence, recently offered a spirited defense of the company, saying Cadence wasn't taking lightly the siege of start-ups. "We will take on all comers, and we will win," he said. "We may be old, and we may be big, but we are not slow. We're trying to stay as young and nimble as a start-up. The only thing I have to thank the small start-ups is for waking us up. We're awake. Wide awake," Mr. Katz has, however, just left Cadence to join Meta-Software, a small company specializing in analog circuit simulators.

Robert Beachler, senior industry analyst at Dataquest, said the goal in the EDA business has been to have "the next great point tool," and "Big companies have historically been unable to do that." EDA leaders have generally hit "something of a ceiling; you tend to implode."

"The difficulty for the large companies is to incentivize its best engineers," Mr. Beachler said. Cadence and Mentor have continued to acquire new technologies, he noted; Cadence, for instance, picked up its new Leapfrog VHDL simulator from a small Ohio company called Seed Solutions. That product has, however, attracted a misappropriation of trade secrets lawsuit from Synopsys. An advantage larger companies have is that they "can offer value-added services, such as consulting, that small companies can't," he added.

"Life has not been easy for either one of them," said Robert Herwick, an analyst for Hambrecht & Quist, of Cadence and Mentor. "Both of these vendors have fallen behind in the quality of their tools." Mentor has been "somewhat distracted" by the problems associated with developing and shipping its release 8.X software and "not able to advance technology as rapidly as they would like to have." Cadence has been "afflicted by people going to start-ups. A number of very able people have left Mentor. Both Cadence and Mentor have had a fairly significant exodus of talented people." Both companies recently lost their top sales executives.

Although EDA customers generally seek an integrated offering from vendors, it's not clear who would step up to replace Cadence and Mentor as broad-line suppliers if those companies continue to falter, according to Mr. Herwick. Of Viewlogic, he said "I would be hard put to believe they would be the replacement." Synopsys is a success with its synthesis software, but its becoming a "leading-edge core vendor ...would be a stretch," he commented. Synopsys, however, has "a stock valuation that would allow them to make acquisitions," an advantage Cadence once enjoyed which was played out with the Valid acquisition of 1991.
 "One aspect of the start-up that's not there (in large companies) is equity; that's the most difficult aspect of it," Mr. Herwick said. "The economic rewards of a start-up are hard to reproduce in a large company."

"There's no question there are significant changes afoot in the marketplace," said Ron Collett, the former Dataquest analyst who now heads Collett International. EDA has reached "market saturation in the high end" and "a fairly significant slowdown" in growth, prompting the established companies to "look much more aggressively into low-end products."

"Companies have to re-invent themselves to fit into the new paradigm," Mr. Collett said. "Leading-edge technology, if we judge looking at history, has come from small start-up companies." The broad-line suppliers have to preserve their revenue streams while changing, and "that's a tall order," he added. The larger companies must move to "a heavy service component," such as outsourcing for customers' design departments, and "that's a far cry from what they're doing today, which is selling technology."

Mr. Collett doesn't see the decline or demise of Cadence and Mentor anytime soon. "It takes a long time for companies to go down in the marketplace," he said. "Cadence and Mentor have a very substantial place in the market." Still, "They certainly have their challenges ahead of them."

 Joseph Costello, president and CEO of Cadence, argues most of the famous defunct companies in EDA were not broad-line suppliers, but only tool suppliers. "Vast numbers of point-tool suppliers have come and gone," he said. "Some people are snuffed in infancy. Witness ExperTest. If they don't have a second act, sayonara."

Broad-line suppliers offer "long-term stability" and can "cover all of the different design methodologies." Large users are "looking for someone to provide the backbone of a design environment," he said. Cadence is able to provide not only "an optimized set of design tools," but offers "a full suite of consulting services" as a broad-line supplier, the Cadence CEO said. And Cadence can reshape its technology base for the low end, he noted. "Having the technology across the board and having that capability is key to survival."

Cadence has given P&L responsibility to all of its product groups, and, in the case of its NVision group, which is developing the Project Figaro set of tools for the field programmable gate array market (EN, June 7), using a different cost structure and setting up a separate sales and marketing organization. "But they're still under the Cadence umbrella," Mr. Costello said.

Cadence's stock was battered by the Q1 downturn and lately has traded around $10 a share, which is where Mentor's stock has been, too. "There's good news and bad news about having a low stock price," Mr. Costello said. Cadence initiated a stock buy-back program after the Q1 fall and now is offering "aggressive stock option grants to our employees," he said.

Despite trying to inculcate an entrepreneurial spirit and respond to the marketplace challenges, Cadence won't succeed without effort. "We can screw it up, if you don't respond to customer needs and if you don't stay on the technology curve," Mr. Costello said. "You can easily fail."

 David Chen, Mentor's vice president of corporate marketing, said the EDA market is "nearing a maturing point," with growth slowing down. "We need to be managing this company for reasonable growth, and for margins and profitability," he said. The prescription? A return to the basic fundamentals, according to Mr. Chen; "The right product at the right place."

Customers want "whole environments," which broad-line suppliers can provide. That includes a variety of services and products. "There's no room for a hollow distribution company," the Mentor executive said. "We provide value to the customer by providing solutions, training, building, changing methodology. We don't see a viable model in becoming a supermarket of CAD. That's doomed to failure."

In the 1980s, users wanted "one-stop shopping for reasonably well-integrated solutions," he added. In the 1990s, "The world's gotten a whole lot more complex." The user now wants a "multi-vendor, low-maintenance design environment."

 Asked how Mentor and other large companies keep their engineering talent, Mr. Chen responded "How does Sun or Motorola or Intel hold on to their best-of-breed engineers? It's a gross fallacy that everybody wants to be in a high-tech start-up. There are different kinds of strokes you get in a large company than you can in a small company."

The role of the broad-line EDA supplier is "changing," Mr. Chen said, but to suppose that such suppliers can't survive due to the multiple industry pressures is "very simplistic and naive."



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