Mentor takes on Wind River: Acquisition spree aims at market leader in embedded system OSes

Electronic News, March 18, 2002 by Ed Sperling, Gale Morrison

Mentor Graphics is on a buying spree to gain ground in the embedded systems world.

While some companies live for acquisitions, Mentor's history has been exactly the opposite. The company went through three years of on-again/off-again negotiations before announcing last week that it would acquire Accelerated Technology Inc. But with customers clamoring for one-stop shopping, not to mention the shadow of Wind River Systems Inc. getting increasingly longer, Mentor believes it no longer can afford to sit back and watch.

"We have an ambition to be the largest player in embedded software," says Mentor President Greg Hinckley. "Right now we're at $30 million and Wind River is at $400 million. Obviously we can't do it all internally."

Meanwhile, Wind River doesn't believe Mentor can do it at all. The company argues that buying up small real-time operating system (RTOS) vendors is no indication it understands the bigger changes in the embedded software world.

"It's nice for them to try to supercharge their embedded business," says Dave Fraser, VP and general manager of Wind River's networks group. "But it's a little bit late--especially since the embedded business has changed completely. It's not about operating systems and tools anymore. It's not about just supplying a little VRTX (Mentor's RTOS) or a Nucleus, in the case of Accelerated."

Fraser says the real challenge now is solving business problems, such as how to improve the efficiency of their development programs, how to get development teams from various acquisitions working together, and how to become more competitive.

"Customers are definitely looking for OSes and tools, but they need a full range of things," he says. "They need networking stacks. They need professional services and a global partner. Our customers are giant companies with huge development departments looking to gain big efficiencies. Quite frankly, we are more like a business re-engineering company than the embedded OS company that's our heritage."

Fraser also contends that Mentor's track record in the embedded world is mixed. "When Mentor bought Microtec, they got a superb debugger in XRay. They took that from being a very nice and strong product to being irrelevant," Fraser says. "Ten years ago when they bought Ready Systems and Jim Ready was an icon in the industry at that time...During that transition (the integration into Mentor), VRTX went from being the No. 1 kernel from the No. 1 company to essentially being a dead product, to just disappearing."

Jim Ready, who left Mentor in 1999 to found embedded Linux player MontaVista, warns that Mentor is taking on a lot with a challenge to Wind River.

"You can imagine that Mentor sees the same market research that others have," Ready says. "[Embedded software] ought to be a very good place to be. But Wind is a formidable, well-financed, obviously successful company. I would not want to go after them on their turf."

But Ready says there is a place for Mentor, if it can play from its strengths. "Mentor's strength is on the EDA side, the tie-in to Seamless," Ready says. Seamless is Mentor's hardware/software co-verification tool, which boasts 90 percent market share, according to Gartner Dataquest's most recent numbers. Dataquest forecasts this to be about a $25.4 million market this year.

"Where Seamless is strongest is the smaller, less connected devices. Some customers can really benefit from Mentor's strengths," Ready says. "They've found the closest coupling with the kind of things that Seamless can support: the smaller, more compact kernel. ...Mentor's strengths are Seamless and the XRay debugger. That's why they bought Microtec, and they put a lot of work in that. It makes sense to pour gas on that fire."

Fraser and Ready contend that Mentor, acquisitions or not, won't be playing in the mainstream embedded systems world where connectivity is paramount. Mentor says it will.

Moreover, Hinckley says that with Neil Henderson running the embedded systems division -- Henderson was president of Accelerated Technology until the acquisition and will now become general manager of the Mentor embedded division--the team is set to make those acquisitions work.

But it clearly will have to work far more quickly than in the past. Mentor has a lot of lost ground to makeup, and it has been extremely slow at closing deals. It spent four years acquiring Ikos Systems, which it also announced last week. In the case of Accelerated Technology, Henderson says the deal was almost closed six months after negotiations began, but the two companies couldn't agree on their combined direction. It took another 42 months to finally strike an agreement.

"A lot of time was spent on potential integration issues," Henderson says.

Price was less of an issue, and executives involved say it will be even less of an issue in the future. With a market cap of between $1.5 billion and $1.75 billion, and most software companies valued in the range of less than $3 million, Mentor executives believe that adding new companies will be a relatively simple matter.