Going forward, the acquisition will be anything but smooth and easy
Synopsys NASDAQ:SNPS is a big name in the world of EDA (Electronic Design Automation) software tools. Two significant players, Synopsys and Cadence, contribute to the development of the majority of SoC (System-on-Chip) products and PCBs (Printed Circuit Boards) that industry watchers care about.
Think of EDA as a suite of software tools, IP, libraries, and a policy layer that Nvidia uses to create, verify, simulate, fix, and then tape out Blackwell or Geforce Ada, and Qualcomm uses for its Snapdragon. Every other chip design, whether it is Intel, AMD, Tesla, or NXP, to name a few, uses EDA software for design and verification before the products get hardened, manufactured in fabs, and printed on silicon wafers.
Synopsys is planning to acquire Ansys NASDAQ:ANSS for $35 billion to make significant inroads into the systems design and analysis market for chip designers, as well as customers in the automotive and aerospace sectors. It is a natural progression to increase the TAM (Total Addressable Market) and, more importantly, it is a way for Synopsys to catch up with its competitor Cadence.
Synopsys’ fast track to the simulation market faces challenges
The acquisition of Ansys represents a major undertaking for Synopsys, as the company is expected to spend $35 billion to finalize the deal. Under the terms of the deal, Ansys shareholders will receive $197.00 in cash and 0.3450 shares of Synopsys common stock for each Ansys share, representing an enterprise value of approximately $35 billion based on the closing price of Synopsys common stock on December 21, 2023.
Buying an established company with a sizeable market share comes at a huge expense. During my 25 years of following the tech industry, I witnessed multiple major acquisitions, and none went as smoothly as one would have hoped for. Such large events involve a lot of friction, cultural differences, and operational differences. It takes years to integrate teams from two large companies. The most recent example is AMD’s acquisition of Xilinx. This process has just started but still resulted in some significant cuts and adjustments to AMD’s way of doing business. Traditionally, whoever pays the bill gets their way.
The major player may have a different vision, culture, and strategy than the acquired company, leading to conflict and misalignment of goals and priorities. A similar scenario unfolded at Intel with Mobileye, Altera, and Gaudi, as it took years to integrate these teams. Based on my experience, the larger the company, the more painful and longer the integration.
Every acquisition of this magnitude involves regulatory oversight. The US, EU, China, South Korea, and Taiwan usually look into the matter, and China usually waits for everyone else to agree before giving its stamp of approval, or not. Qualcomm’s aspirations of acquiring NXP were abandoned due to China’s stalling.
There is also the East Coast vs. West Coast corporate mentality to consider. The major player based on the West Coast has an IT mentality, while the acquired company is based on the East Coast and has no IT mentality. This can create challenges in communication, collaboration, and coordination, notwithstanding the usual issues caused by time zones and regional differences.
This gets us to the chip company vs. simulation company angle. The major player, Synopsys, the chip company paying the bill, acquired Ansys, a company in the simulation business. This could potentially result in a substantial mismatch of expertise, products, and markets.
The competition is using the uncertainty of the acquisition to increase sales, win accounts, and attract talent. This is happening as both Synopsys and Ansys people feel insecure about the future. The merger may cause difficulties in integrating the acquired company’s systems, processes, and people, causing delays, disruptions, and inefficiencies in its core business. Some customers may not want to live through that.
There will be an overlap as well, both in terms of services and functions within the acquired company, leading to redundancy, competition between teams, and confusion among customers and employees.
The competition
Cadence Design Systems got started in System Design and Analysis journey with strategic and synergetic acquisitions some twelve years ago. Making small companies and talent acquisitions along the way, the business grew organically. Taking more than a decade to secure its position in an established market resulted in healthy growth.
However, the limited potential growth in the EDA market resulted in major players looking for new, similar markets with a substantial TAM and larger growth potential. Wall Street expects companies to continue growing, and systems simulation is one unfulfilled field where one can simulate real-life problems and expand to other industries, aside from integrated circuit design. Doing simulations such as Computational Fluid Dynamics (CFD) opens new perspectives and opportunities for traditional EDA-using companies.
One of the reasons to go after the System Design and Analysis game is that math and science are fundamentally the same. The lucky break was that some of the tools and algorithms used for voltage in EDA were able to simulate Computational Fluid Dynamics (CFDs), and the company gained a foothold in that market.
The expansion to Systems Design and Analysis was a natural progression that Cadence started as early as 2017. Cadence acquired smaller CFD companies that already had a customer base, and often spent pennies on these acquisitions.
NUMECA out of Belgium was acquired for its expertise in CFD, mesh generation, multi-physics simulation, and optimization.
Pointwise out of Fort Worth, Texas, was another targeted acquisition finalized in 2021 to grow the company’s footprint in Computational Fluid Dynamics (CFD) and mesh generation. Another acquisition worth mentioning was Future Facilities, acquired in 2022.
After that, Cadence acquired OpenEye Scientific, a computational molecular modeling and SD&A software specialist whose solutions are used by pharmaceutical and biotechnology companies for drug discovery. This is another field where simulations powered by AI have exciting potential for the future.
Conclusion
Acquisitions of such magnitude have the potential to create a lot of problems. First, the deal might not close at all, as we have seen in the past. Second, regulatory agencies, especially Chinese ones, might create delays or even deny approval. Given the current political climate between the US and China, this scenario cannot be ruled out. Uncertainty about how things will progress is already affecting employees and customers. At the same time, competitors are trying to advance their sales, secure large accounts, and obtain more talent.
EDA and computational simulation are two different businesses. The fact that one can help a customer create a great compute chip, SoC, or PCB doesn’t necessarily mean it will make you a great match for a company doing computational fluid simulations. EDA companies aren’t always entrants to the SD&A space.
The financial aspect cannot be ignored, as the cost of funding the $35 billion acquisition will be substantial and may impact current operations and existing plans. Entering the simulation game late will result in real challenges, and Synopsys and Ansys should brace for uncertain times ahead.
