Mentor’s Final Sale

In the end, Paul Singer did what Carl Icahn couldn’t: Got Mentor sold.

Singer, the hedge fund manager known for taking large positions in companies and pushing for tough changes, breakups or sales, started accumulating shares of the EDA CAD company earlier this year. In September, it was revealed that his company Elliott Management, had bought up 8.1% of Mentor’s stock. Elliott immediately started lobbying for changes.

For Mentor, it could have seemed like a recurring bad dream. The company had been through this before, starting six years ago, when Carl Icahn, himself a famed corporate raider, began acquiring shares and issuing accusations of waste throughout the organization.

Icahn’s relationship with Mentor was public and acrimonious. Soon others joined the fray. Everything went under the microscope, from spending on marketing to the personal wealth of the directors. CEO Wally Rhines came under attack for pocketing $65 million from Mentor while the company generated only $113 million in free cash between 2001 and 2011. Icahn even offered to buy the company outright for $1.9 billion, a figure Mentor’s board dismissed as too low.

The board, however, couldn’t outright avoid Icahn and the others, who at their peak owned more than 20% of the company. Instead, they executed a “poison pill” amendment to its bylaws, making a hostile takeover more expensive and risky.

Icahn managed to land three directors on Mentor’s board but never affected the breakup or sale he had hoped for. Mentor bought back half his shares in February for $146 million, and he sold the last of his holdings in May.

Icahn certainly made a pile of money off Mentor. It took Singer, however, to fundamentally change the trajectory of the company.

Upon Elliott’s announcement, Mentor charted a different course. Instead of waging another attempt to fend off the barbarian at the gate, this time it signed on with Bank of America as an advisor to a possible sale. The deal with Siemens came quickly thereafter.

Singer’s stance was Mentor was undervalued by 20%. The price Siemens is paying — $4.5 billion — suggests even he was low.

Siemens was never a stretch as a suitor. As far back as 2011, we suggested the German conglomerate was one of a few companies that made sense to possibly acquire Mentor.

For some involved, the deal completes a circle. Mentor will become part of Siemens PLM, whose president Tony Hemmelgarn is a former Integraph executive. In fact, he was director of sales and marketing when the company spun off its Electronics Division into a wholly owned subsidiary known as VeriBest. Mentor then acquired VeriBest for $19 million in 1999.

It does spell the end to Mentor after 35 years as a standalone company. Founded by a trio of Tektronix engineers — Tom Bruggere, Gerry Langeler and Dave Moffenbeier — in 1981, Mentor added the PCB division through a merger with CADI in 1983. (Just after, Mentor hired the legendary John Cooper, who with partner David Chyan eventually developed the first shape-based router.)

In all likelihood this also means an end to Wally Rhines’ 23-year tenure as head of Mentor. He will be remembered as a steady leader during a period of great upheaval and M&A in EDA. On his watch, Mentor’s revenues grew from $340 million to nearly $1.2 billion. That’s a pretty darn good run.

Less clear is how the rest of the industry will react. Siemens gives Mentor exceptionally deep pockets, a buffer against meddling shareholders, and an extensive market for technology both as a customer and to partner with. The focus on “concept to system” just got a big boost.

By comparison, on the PCB side, the door has been slammed shut on one of the exit strategies for Cadence and Altium. Dassault has been rumored to be kicking the tires on Altium; this could trigger a move. Will PTC, which shares a Boston area neighborhood with Cadence, be compelled to act as well in order not to get shut out of ECAD? As one longtime industry observer noted to me recently, “It’s about the form factor.” OEMs want to design product in its entirety, not in silos of electrical, electronics, mechanical and wire harness. Given that, it’s a safe bet the M&A in ECAD won’t stop with this deal.


Good Talk

The big story out of IPC Apex Expo last week – about the only story, really – was the introduction of an open communications standard by Mentor Graphics’ Valor division, followed by the rapid response by more than two dozen assembly equipment providers and software developers over shared concern that the solution to machine-to-machine communication might end up residing in the hands of a single company.

At the heart of the matter is the so-called Industry 4.0. Also referred to as IIC (US), Made in China 2025 (China), Industrial Value Chain Initiative (Japan), Manufacturing 3.0 (South Korea) and other names, it stands for the capability for different equipment, made by different OEMs, to share bi-directional data over an open, yet secure, platform. Done right, it’s a major step toward permitting manufacturers to pick the best machines for their specific needs, versus being beholden to a single line solution. Fundamentally, it’s at the heart of a fully beating Internet of Things; some feel the fully automated factory can increase production efficiency by more than 30% over time, adding billions or more to national GDPs.

Let’s start with the Mentor specification. Two years in the making and announced just prior to the annual IPC trade show, it was released at the Las Vegas event as OML, which stands for Open Machine Language. Having years of experience writing translators for various assembly line machines, Valor took those translators and installed OML in front of them, and packaged the combination in a black box. Thus, in a relative instant, a solution to a much-discussed electronics assembly problem was at hand; OML satisfied the need for machines to talk to each other, and the box handled any connectivity issues.

Mentor planned to make OML available to any company through a partner program and would retain ownership over the protocol while relying on the partners to help shape the future direction of the specification.

In Las Vegas, of course, everything’s a gamble. Once word got around the show, equipment vendors said “not so fast.”

Mentor’s angle was to multiply the use of IoT through OML, thus exponentially expanding the market for its Valor tools. Perhaps worried by the legalese, or the potential for a single “owner” to license and potentially change or even shut out competitors, roughly two dozen assembly OEMs met over the course of two days to hammer out an agreement that reshapes the trajectory of the specification. Several equipment OEMs PCD&F/CIRCUITS ASSEMBLY spoke with agreed OML is technically sound but felt the business issues inherent in licensing a corporate spec could pose a host of problems. Up against this strong front, Mentor pivoted and offered OML as a starting point for a to-be-determined IPC standard.

In one sense, then, bi-directional communication goes back to the drawing board. Some 15 years ago an IPC committee published a shop floor equipment communication standard labeled IPC-2541 and colloquially known as CAMX. One presenter at the Apex sessions demonstrated how IoT could work using enhanced CAMX. The early take – and this has yet to be finalized, as not even the charter is on paper yet – is the task group will study a combination of OML, CAMX and perhaps other, yet-to-be-written software as part of its IPC mission.

All sides agree there will be an emphasis on speed. If nothing else, OML forced the industry to confront the fact that not only is a standard needed, it was needed yesterday.

Going forward, it will be up to each software company and manufacturer to leverage the IPC standard as they see fit. It remains to be seen if Mentor will ultimately concede OML or whether it will attempt to go it alone.

Some will recall a similar scenario with the data transfer formats for printed circuit board designs. Various specifications sat mostly idle for years, IPC-D-350, IGES and EDIF among them, until the powers behind Valor’s ODB and IPC’s GenCAM formats squared off. Valor donated the XML version of ODB to IPC in 2008, yet continues to maintain its ODB++ format. GenCAM evolved into IPC-2581, and upon Mentor’s purchase of Valor, finally gained traction among worried software competitors and OEMs who feared being shut out of markets or forced to switch tools.

Regardless of the back story, this is where the industry stands today, and a basically workable plan is being formulated. The speed with which the industry moved – and Mentor should be thanked for spurring action – screams the need is present and widespread, and there is general consensus on the solution. That’s a great story. After all, in electronics, how often does that happen.

The New Verticals

Chasing the vertical OEMs is not a new strategy in EDA.

But it is becoming that much more widespread as the major players extend their reach from automotive (long the domain of Mentor Graphics) to other sectors.

Semiconductor design companies — the linchpin to the product development and cash flow of Synopsys, Mentor and Cadence — are expected to consolidate over the near term, and the revenue outlook from that market is being tempered.

But the “new verticals” — military, aerospace, IoT, cloud — offer the chance for the EDA titans to extend their reach by not only selling IC design software but also an ever-growing array of emulation, analysis, and system design tools to a single customer. Doing so tightens the binds between EDA firm and customer, potentially making the deal more profitable as some list price devaluation that naturally occurs with bundling is offset by a lower cost of sales (including commissions).

As Cadence CEO Lip-Bu Tan said this week, “We had been emphasizing system design development. That basis is providing the entire vertical solution spec that is from IT tool and PCB and a host of system design and verification and we strongly believe that is the strategy going forward to meet the requirement of some vertical (markets).

“IoT, the cloud infrastructure and the massive cloud infrastructure fueling up; the automotive as kind of the connective devices; some of the medical field and DNA sequencing … and a few others: those can be clear application for some of our IT portfolio and some of our EDA flow and also some of our hardware PCB and system analysis requirements.”

We are starting to hear the major EDA companies discuss the PCB segment on their quarterly conference calls. This is an emerging trend; not long ago PCB was an after-thought to most analysts because the revenues were so puny compared to those of semiconductor. Now that PCB is part of a larger strategy, as opposed to simply a (profitable) business unit, that’s changing.

As this strategy ramps, it could very well shift the scope of acquisitions by the major EDA players. For decades, Synopsys has stayed far away from owning PCB design tools  although some of its tools have been tied into Zuken’s. Its last foray into PCB came when it acquired Viewlogic in 1997; management quickly bought out the PCB design segment the next year. Would a shrinking semi customer base lure them back in?

Most PCB design M&A related deals these days are tied to filling gaps in technology. There’s still a disconnect between ECAD and MCAD, and there will be some shakeout as new disruptive hardware startups enter the field. So while Cadence and Mentor are pursuing true top-down strategies, not everyone is following suit.

Altium corporate director, technology partnerships and business development Dan Fernsebner told me at PCB West last month, “Incubators and hardware startups have to put products out very quickly, and they have to be right the first time.” Fernsebner says the model for these companies is shifting from enterprise engineering to relying on reference designs.

Does the change to entrepreneurship pose a challenge for the developers in terms of having to reevaluate their business models, I asked Fernsebner. “I think you’ll see explosive new companies changing the business model for those who have been in it for years,” he said, citing Telsa, Nest and Skully, companies that develop products that are field-upgradeable.

It’s rare that any single model wins out completely. But if the end-customers in key industries begin to flex their muscles, it won’t be long before the M&A activity gets really interesting.

CAD Software Pricing Wars Heat Up

Another price/performance battle is heating up in PCB design software, and this time Altium could feel the burn.

Altium has experienced decent growth over the past few years, reaching about $75 million in annual sales. That’s not a huge sum compared to the Big Three of Mentor Graphics, Cadence and Zuken (subsequently referred to as MCZ), but it no doubt is getting the attention of the big boys, given the fairly modest pace of PCB design layout seat growth.

After dropping pricing on its signature Altium Designer tool from $14,000 to about $5,500 in 2008, Altium then raised them more than 30% a year ago this month, with some reports indicating even larger spikes, plus support.

Mentor today fired a big shot across the bow, pricing its newly configured shrink-wrap Pads suite at an entry level  price of $5,000, including a year of support. A mid-range version is priced at $10,000, in line with Designer once support is factored in.

Mentor made its move to target so-called independent users, those who may work for corporations but have the latitude to go outside the enterprise CAD system for their tools. That sector is characterized by engineering generalists who look for lower seat costs and aren’t driven by the particular tool. Will Altium counter move, or will it take a chance that it can wait out its deeper-pocketed competitor, hoping that Mentor lacks the patience to withstand the margin pain?

No matter how this plays out, a company can only grow so large in the shrink-wrap space. Enterprise is where the big bucks come from, and that space is dominated by MCZ. And that next move is Altium’s.




The Best-Read PCD&F Articles in 2014

As we did with CIRCUITS ASSEMBLY on Monday, here’s the list of the best-read new articles at this year.

Leading the pack was IMI president Peter Bigelow, whose piece “When ‘Scaling Up’ Leads to ‘Belly Up’ ” received the most hits of his 10-year career as our columnist.

Next up was “A Two-Team Race?” Dr. Hayao Nakahara’s annual list of the largest PCB fabricators.

Coming in third was “Design for Reliability with Computer Modeling.” Dr. Randy Schueller and Cheryl Tulkoff, both with DfR Solutions, explained a new CAD tool that imports design files and quantitatively predicts product life.

They narrowly beat out “Magnification vs. Resolution in Visual Examination Specifications,” by Louis Hart of Compunetics and consultant Robert Simmons.

Coming in fifth was “Design Practices for Panelization and Depanelization,” by Phil Lerma, fabrication manager at NexLogic Technologies.

In sixth was Patrick Carrier’s “Maximizing Capacitor Effectiveness,” the first of multiple contributions from Mentor Graphics.

Next was “Power Electronics Packages with Embedded Components – Recent Trends and Developments,” by Lars Boettcher, Stefan Karaszkiewicz, Dionysios Manessis and Andreas Ostmann, who summed the work of a cross-industry team’s development and testing of a PCB-based embedded chip technology for an under-the-hood automotive application.

They were followed by “Qualification vs. First Article Inspection,” authored by Charles Hill and Karen Ebner of Raytheon.

The ninth most-read piece was “Effectively Managing PCB Design Constraints,” by John McMillan of Mentor Graphics.

And closing out the Top 10 was yet another Mentor offering, “Passing Electrical Signoff,” by Rod Dudzinski and Minoru Ishikawa.

The top written staff articles were “The One-Stop SoCal Shop,” senior editor Chelsey Drysdale’s look inside Murrietta Circuits, and “Good Values in Vegas,” our staff writeup of the 2014 IPC Apex Expo trade show.

We want to thank all our contributors from last year, and especially our loyal readers. Happy new year!

ODB++ Plus, Plus, Plus

I wrote a bit about ODB++ back in October. Nothing has really changed much since then. I’m just clarifying a few things.

First, I want to put more emphasis on the use of ODB++. In addition to being beneficial to the manufacturing process, it can make your job a little easier. If you send ODB++, you do not need to send either the centroid or Gerber files. The ODB++ replaces both.

Eagle CAD does not have an ODB++ export. However, the Eagle .brd file will work too. You can send the .brd instead of the centroid and Gerber files.

If you can’t send either of those formats, we as an EMS still need the centroid and Gerbers (top copper, bottom copper, solder paste stencil, silkscreen and solder mask layers).

Duane Benson

Number Six
I am not a number, I am a free man!

All Quiet on the Wilsonville Front

A timely piece from the hometown paper of Mentor Graphics looks at how Carl Icahn has calmed down now that Mentor’s stock price has doubled since he started accumulating shares of the company a couple years ago.

The legendary investor is Mentor’s largest shareholder, at just under 15% of the company. Since he starting buying up shares, Icahn has been vocal about the need for the software company to shed its country club culture. He forced the issue in 2011, successfully getting three of his nominees elected to the company’s board. Last year, Mentor only nominated one of the three, which drew fire from Icahn, but with the stock price up 50% over the past 12 months, all is quiet in Wilsonville.


Riding High on Design

The herd is riding on the EDA vendors, almost all of which are at or near 52-week high share prices.

In the past week, Cadence, Mentor and Synopsys hit or were trading just pennies off their yearlong highs. National Instruments and Ansys both traded much closer to their highs than their lows. Even Altium closed in on a high, but that’s a bit deceiving because it’s a penny stock and lightly traded on the Australian exchange.

So, is it the investor herd driving up an industry? Or is it a sign that the EDA market, which topped $5 billion for the first time in 2011, is geared up for a sustained run?


Behind the Sigrity Deal

Cadence’s acquisition of Sigrity, announced yesterday, is a big deal for reasons beyond the technology being acquired.

Sure, it’s great for Cadence to gets its hands on Sigrity’s power and signal integrity tools.

But what this move also underscores is something of a recommitment by Cadence to its printed circuit board software. You’d have to go back years to find the last time Cadence completed a significant deal in the PCB space (I’m not including, of course, the failed 2008 “attempt” to purchase Mentor, which eventually cost then CEO Michael Fister his job.)

Cadence’s PCB revenue jumped in 2011, growing by our estimates roughly 23% year-over-year. That makes it by far the fastest-growing player in the PCB EDA space. How long has it been since they could say that?

Coupled with its aggressive support of the IPC-2581 data transfer format, Cadence is showing a newfound vigor toward protecting and even extending its circuit board design position. Mentor remains a much larger competitor in PCB sales, but there are signs of a shift taking place.