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AVANTI: The Acquisition Game

AVANTI: The Acquisition Game
by Daniel Nenni on 10-05-2018 at 7:00 am


This is the eighteenth in the series of “20 Questions with Wally Rhines”

Gerry Hsu’s departure from Cadence to form Avanti (originally named ArcSys) is chronicled in legal testimony as accusations of theft of software were followed by legal battles, financial awards and even prison terms. Mentor and Synopsys were simply onlookers as the drama unfolded but both had an interest in the outcome. The outcome of the trial pointed to substantial civil damages that Avanti would have to pay to Cadence. Mentor went to work with some of the top legal advisors at O’Melvany and Myers to estimate just how much those damages would be. Synopsys was reluctant to engage but was worried that, if Mentor acquired Avanti, the EDA balance of power could shift.

Gerry Hsu had taken up residence in Taipei, having avoided criminal charges for which some of his employees were not so lucky. Chi-Foon Chan, then EVP of Synopsys, suspected that Mentor was negotiating with Gerry Hsu to buy Avanti and Chi-Foon has since told me that he called every major hotel in Taipei to see if I was registered as a guest. In reality, we were much more serious about buying Avanti than Chi-Foon imagined. I rented an apartment in Taipei and spent more than a month living there and regularly meeting with Gerry. Meanwhile, Greg Hinckley, who was then Mentor CFO but effectively becoming COO, conducted meetings with the investment bankers to determine how we could put together a successful proposal to buy Avanti.

The bankers paid a lot of attention to two issues: 1) Negotiating how much they would be paid for the transaction and 2) Removing the absurd benefit in Gerry Hsu’s contract as Avanti CEO that would pay him $10 million if he left Avanti for any reason. Why would a Board of Directors approve such a condition? The Board of Avanti at that time consisted of five people, four of whom were employees who reported to Gerry, and the fifth was a forestry major whose knowledge of semiconductors and EDA was very limited. Securing approval for this condition couldn’t have been very difficult for Gerry even though it seemed to stand in the face of most responsible corporate governance. Greg, who is one of the best “out-of-the-box” thinkers I’ve ever known, addressed the bankers with a different question. “Why don’t we triple the amount”, suggested Greg, “and offer to pay Gerry $30 million instead of $10 million”? The bankers were aghast. Why would we do that? Greg’s response: “There’s obviously only one decision maker for the sale of the company so why don’t we appeal to his self- interest?” The bankers were skeptical but we put together a proposal that incorporated this feature. As justification, we asked that Gerry extend his non-compete agreement from one year to three years in trade for tripling the severance payment.

I arranged to have dinner with Gerry in Taipei. He brought his son along and I presented the proposal. When I highlighted the change in severance arrangement for Gerry, he quickly became suspicious and began arguing with me that he was entitled to the $10 million severance payment. I had to repeat twice that I didn’t dispute his right to the payment; I just wanted to extend his non-compete agreement to three years and triple the severance payment. Once Gerry understood, he became enthusiastic about the proposal and asked how quickly we could close an agreement. I cautioned Gerry that the terms of the agreement must be confidential and I had Gerry approve the letter of intent and confidentiality agreement. We shook hands on the deal and I called the Mentor team to join us in Taipei to finalize the agreement.

I can’t be sure how Gerry communicated with Synopsys but, by the time the Mentor negotiating team arrived, Gerry was already expressing second thoughts about his agreement to be purchased by Mentor. It became apparent that he was talking to another potential buyer despite his commitment to Mentor. So we returned to the U.S. with no deal. Subsequently, Gerry’s team contacted our bankers to re-start negotiations but we held firm, responding that we didn’t feel we could trust him based upon our previous experience. We didn’t engage again. Negotiations between Synopsys and Avanti continued and a deal was announced on December 3, 2001. A long period of review by the International Trade Commission ensued. After more than six months, the transaction was approved. Details were then published in a joint S4A filing by Synopsys and Avanti – https://www.sec.gov/Archives/edgar/data/883241/000095012302004502/0000950123-02-004502-index.htm Among the most interesting details for me were:

  • Synopsys hired attorneys to estimate the cost of the civil damage award that would likely be incurred, just as Mentor had done, and the answer came out nearly the same as the estimate that Mentor had received. This was somewhat remarkable when you consider the uncertainty of outcomes in the U.S. legal system for disputes in high technology.
  • The agreement between Synopsys and Avanti included a $30.6 million cash payment to Gerry Hsu for his employment agreement. He didn’t ever thank me.There was a benefit for Mentor, however. Cirrus Logic was one of the first to detect anomalies in the Avanti software that led them to believe that the Cadence accusation of theft was credible. Under certain conditions, wavy lines appeared on the screen with the Avanti place and route software in the same manner as Cirrus had experienced with Cadence place and route software. Mike Hackworth, CEO of Cirrus Logic, became concerned and talked with Joe Costello, CEO of Cadence, about switching back to Cadence for place and route. Mike’s limitation was that Cadence would have to develop a tighter integration with Mentor’s Calibre design rule checking software which Cirrus had adopted. We had a three way conference call among Mike, Joe and me where I insisted that we needed to obtain detailed specifications for Cadence’s LEF and DEF standards. Joe readily committed and assigned Bob Wiederhold, previously CEO of HLD, a company that had been acquired by Cadence, to effect the transfer of information. That’s when we found out that DEF was not one standard, even in Cadence. There were many versions and interpretations. Despite all this, we were able to work together and Calibre became tightly integrated with Cadence, and also Synopsys, making it successful in most of the design flows in the industry.

    The 20 Questions with Wally Rhines Series

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