Wednesday, May 19, 2010

At What Price Growth?

The blogosphere is afire with commentary on Cadence's acquisition of Denali, including

Though I'm not a financial analyst, I do have reasonable familiarity with the stock market. And, being the thrifty guy that I am, I'm having trouble to justify Cadence's valuation of Denali. Pulling a quote from Gabe's analysis post, Denali had trailing twelve-month revenues of $43 million, implying a 6.3x EV/sales. Priced at over 6X Sales! For a company that's been around a number of years, and while it has a healthy business, is not forecast for hyper-growth? How do companies justify such valuations? (I'm asking sincerely--perhaps there's an analysis angle that makes this look like a good bet.)

The more I read, the more I scratch my head about whether this is a good venture for Cadence. Gotta give them credit for trying something outside the EDA product box, though. It seems they are gunning for Synopsys DesignWare IP business, and using Denali to give themselves a jump start.

Caveat: I haven't read Cadence's "EDA360 Manifesto", so I may not fully appreciate the cleverness of their overall strategy.

1 comment:

Sean Murphy said...

There must have been competing bids to justify this price in this market. It's a cash deal so Cadence parted with about 40% of their cash to acquire Denali. They must have really wanted it.

Denali had about 45 million in the bank which should be enough to launch a new product or put more marketing push behind current ones so Cadence must see a deeper synergy. Part of the problem is that none of the memory suppliers are going to want a solution that only works with Cadence simulators or design environments: one of the strengths of Denali was that it was not part of the Big 3, so it's not clear how receptive they will be to Cadence-centric offerings going forward.