Viewlogic-Chronologic feud erupts

Electronic News, May 29, 1995 by Jeff Dorsch

LOS ALTOS, CALIF.--A long-simmering dispute between Viewlogic Systems and the management of its Chronologic Simulation subsidiary broke out into the open last week with the resignation of most senior executives at Chronologic and an exchange of lawsuits.

The former Chronologic managers, many of whom were also shareholders in the start-up before selling out to Viewlogic a year ago, contend the primary issue in the unusually-public fracas is the autonomy Viewlogic promised the subsidiary and allegedly failed to provide after the acquisition. Viewlogic management says the precipitous drop in Viewlogic's stock value since the transaction was concluded in March 1994, especially the 47 percent fall in January of this year, caused the discontent at Chronologic.

In their lawsuit filed last week in Northern California's U.S. District Court, the former Chronologic managers seek to reclaim the ownership of the company, which markets a speedy Verilogbased simulator called VCS. Viewlogic filed suit in Massachusetts state court against John Sanguinetti, now the former president of Chronologic, alleging breach of fiduciary duty and breach of loyalty to Viewlogic.

The disruption stands to benefit Cadence Design Systems, whose Verilog-XL simulator faced its greatest competitive challenge from VCS, observers noted. Cadence recently introduced NC-Verilog--a souped-up Verilog simulator based on a new architecture ostensibly in answer to VCS.

According to industry observers, Chronologic last year far exceeded Viewlogic's sales quota. Chronologic executives were angered, however, when Viewlogic took steps to curtail the autonomous operation of the subsidiary by merging Chronologic's sales personnel into the Viewlogic sales force.

Viewlogic last year acquired Chronologic for 912,000 shares of Viewlogic common stock, then worth about $26.5 million (EN, April 4, 1994). Chronologic's shareholders reportedly took the deal over an allcash offer from Synopsys because Viewlogic promised to give Chronologic more autonomy, although the Synopsys offer was said to be worth more.

The price of Viewlogic's stock slid from the high 20s last year and then collapsed to $9.75 when the company reported in early January that 4Q94 results would be lower than expected (EN, Jan. 9). The stock has barely recovered since then; late last week, it was trading at $10.625, shrinking the value of the Chronologic deal to about $9.7 million.

Some, but not all, of Chronologic's shareholders were doubly stung when the IRS insisted they pay taxes on the value of the Viewlogic stock on the day of the deal's closing last year, and not on the later, deflated value of the stock. But that was a side issue in the dispute between Viewlogic and Chronologic management, according to Dr. Sanguinetti.

Representatives of Viewlogic and Chronologic engaged in negotiations for several weeks since January to try and resolve the issues of autonomy and the stock price drop. One discrepancy in the dispute is Viewlogic's report that Dr. Sanguinetti was "dismissed" last Monday, although Dr. Sanguinetti said he and the other executives resigned.

"The big sticking point is the stock price," said Will Herman, the new executive VP and COO of Viewlogic. "That's not to say other things aren't wanted. We had agreed on how to deal with all the other issues on the table. Chronologic was acquired when the stock price was much higher. There's a desire to be made whole." On the autonomy issue, "there were various proposals on the table."

The merger of the sales forces was not undertaken until nine months after the acquisition at the end of last year, according to Mr. Herman. "Chronologic overachieved its numbers. We took a four-person sales force and made it a 204-person sales force, and, lo and behold, you can sell more."

Viewlogic last week named Arthur Reidel, the president and CEO of Sunrise Test Systems, as GM of Chronologic. Sunrise is a Viewlogic subsidiary, acquired last fall. Mr. Herman and Viewlogic president and CEO Alain Hanover were both in Northern California last week to handle the fallout from the Chronologic dispute.

"We're obviously not thrilled with the situation," Mr. Herman said. "We thought we had a deal on this." As of last week at least, Chronologic's engineering staff remained intact, according to the Viewlogic executive.

Dr. Sanguinetti said last week, "The central point is autonomy for Chronologic." He said when Chronologic negotiated the acquisition with Viewlogic last year, the Chronologic shareholders and executives were impressed with "the Viewlogic merger model" as it was presented to them. "The acquired company would be an independent subsidiary."

Once the acquisition was consummated, Viewlogic showed that "they didn't intend that all parts of Chronologic remain independent," Dr. Sanguinetti said. "They started merging departments."

After January's stock fall, negotiations to resolve the differences went on for months. "We were negotiating with Viewlogic up until (May 19)," Dr. Sanguinetti said. "Viewlogic filed suit on May 8. They notified us that they weren't interested in meeting again. We filed our suit on Monday. I think they were pretty clearly not negotiating in good faith."