Mentor Graphics to buy embedded software leader

Electronic News, Oct 16, 1995 by Judy Erkanat

san jose, calif.--In a move echoing the electronic design automation (EDA) industry's search for ways to branch out into related but non-EDA arenas to expand beyond the mature market of selling design tools, Mentor Graphics last week set plans to acquire Microtec Research, Inc. The two companies have signed a definitive merger agreement under which Microtec will operate as a new business unit within Mentor, with both companies continuing to focus on their individual primary business.

Under the terms of the merger agreement, which takes the form of a stock swap, each outstanding share of Microtec common stock will be converted into approximately 0.693 shares of Mentor common stock. The closing price of Mentor's common stock on Oct. 6, as quoted on the NASDAQ National Market System, was $20.125 per share. This puts the transaction's estimated total value at $130 million. The merger, subject to such conditions as the receipt of specified regulatory approvals and confirmation by Microtec's stockholders, is expected to close by year end.

This would be Mentor's highest-valued acquisition since its 1990 purchase of Silicon Compiler Systems (SCS), which was a $110 million stock-swap deal.

"This is an excellent sign for Mentor Graphics and Microtec Research, and for the embedded software and hardware design industries," Walden C. Rhines, president/CEO of Mentor Graphics, said at a press conference held here to announce the merger. "We've broken the mold and created a new kind of company. This is a pooling of resources rather than buying of technology.

"The design, integration and test of embedded software is quickly becoming the dominant factor in the development cost, time-to-market and value proposition of electronic systems, whether they are implemented as printed circuit boards or single chips," said Mr. Rhines. "These issues cannot be addressed adequately without reaching outside of the confines of the traditional EDA industry. We have, in effect, defined a new company, dedicated to providing solutions that avoid the sub-optimization of disjoint hardware and software design flows prevalent today. Microtec Research is clearly the leading source of embedded software technology and the best partner for providing an integrated hardware/software co-design solution."

The merger also addresses the quandary of system design on silicon, which Mentor prides itself on taking by the horns, coming up with hardware/software co-design as the answer. Mentor's Systems on Silicon (SOS) Initiative, announced last May, is a company-wide program slated to meet the growing challenge of installing entire systems, both hardware and software, on a single piece of silicon. It mandates hardware/software co-design to address design complexity issues driven by growth in 32-bit embedded applications, enabling deep-submicron technology and the convergence of the computer, consumer and communications markets.

"With a large segment of the embedded software industry still using difficult to maintain internal tools and with the move to 32-bit systems, we see continued rapid growth in our industry. We're coming through the same territory the EDA industry went through five to eight years ago," said Mr. Rhines. "We are creating a new company positioned to deliver hardware/software co-design to meet the demand of the embedded software market, which is growing at 30 percent or $800 million, and hardware design, with its 11-14 percent growth of $1.6 billion, equalling a total market of $2.4 billion with over $400 million in revenues."

He described the industry's current situation and detailed what the future holds. "On the software side, the focus used to be predominantly on hardware design," he explained. "Today, it's a combination of hardware and software, which presents a difficult challenge. But the technology is predictable. We know the number of transistors per chip today and what that number will be by the year 2000. Design team size has not appreciably increased, but by the year 2000, when the number of transistors designed per hour will be up to 10 times what it is today--and customers will still want to do more with less."

Mentor approached Microtec on the merger and, although the companies worked together for the last five years on product co-development, the actual deal took months, rather than years, Mr. Rhines said. Under this new functional relationship, the companies plan to have their first joint products to market by mid-1996.

"Both Mentor Graphics and Microtec Research are in a strong growth mode and will add personnel," said Mr. Rhines "There will be no change organizationally, except that Microtec Research reports to Chung Tung, VP/GM of the Hardware Software Systems division, upon completion of the merger. Barring joint financial reporting, there will be no further integration of the two entities."

Stock impact, based on prudent assumptions, is projected to be mildly dilutive in current year, to the tune of 3-5 cents per share, with no real effect on shareholders in 1995. For 1996, except for the mild dilution, no major effect is expected. Rather, the new business model is expected to affect growth positively, accelerating profits for both companies.