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Weary Wednesdays at Cadence:
When will it end?

November 10, 2008

Over the last 25 days, Cadence has announced resignations, a restatement, and a restructuring. Big words, but pretty much everybody knows the real terms are fired, accounting irregularities, and layoffs.

The fact that Cadence has used the antiseptic re-XX terminology in their corporate narrative of late is undoubtedly more related to the glossary in the SEC playbook, than any desire to obfuscate the facts. But really, who cares? It’s not how the news has been announced over these last 3 weeks that matters; it’s the future shaped by that news that‘s of concern.

Where does Cadence go from here? At this writing, it’s really not clear.

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Wednesday, October 15th …

The resignations of the CEO and all four Executive Vice Presidents on October 15th was pretty earth shattering, perhaps not for the whole world, but certainly for the EDA Nation. Even industry analysts went on record to express surprise that the whole senior team would get whacked on a single day, without the Board of Directors having a new team to step in straightaway to ease the transition. In EDA-speak, the concept is called seamless interoperability. It was pretty clear on October 15th, the Cadence Board wasn’t grasping a technical idea that sits at the center of the EDA mindset.

Or so it seemed …

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Wednesday, October 22nd …

On October 22nd, the “Interim Office of the Chief Executive” (includes Board Chair John Shoven, Board Vice Chair Lip-Bu Tan, CFO Kevin Palatnik, and SVP for Business Develop Charlie Huang) pulled the plug at the very last minute on the required-by-SEC-regulations quarterly earnings disclosure.

Instead, on the afternoon of the 22nd, Cadence announced an investigation into a possible restatement of 2008 earnings, and a warning that some dollars that belonged in the Q2 and/or Q3 buckets, and beyond, may somehow have been thrown into the bucket for Q1. Oops. Per the October 22nd press release:

    Cadence initiated the review after preliminarily determining during its regular review of its third quarter results that approximately $24 million of revenue relating to these contracts was recognized during the first quarter of 2008, but should have been recognized ratably over the duration of the contracts commencing in the second quarter of 2008. Cadence expects to restate its financial statements for the first quarter of 2008 and the first half of 2008 to correct the revenue recognition with respect to these contracts.

No wonder a “seamless” transition to the next leadership team was impossible. Like many have already said, show me the CEO candidate who’s willing to take over an organization that’s bleeding bad news from every nook and cranny, including some news that’s possibly even legally damaging.

Meanwhile, it’s hard to understand how Board Audit Committee Chair Roger Siboni, a former COO of KPGM (who, by the way, are the Cadence auditors), and Audit Committee member John Shoven, the Charles Schwab Professor of Economics at Stanford and former Chair of Economics there, did not know until October that there were problems with Cadence earnings reports released much earlier this year.

Per Cadence’s Laws of Governance:

    The Audit Committee assists the Board of Directors in its oversight of the integrity of the financial statements of the company, compliance with regulatory requirements, and the performance of the company's independent auditors and internal audit function …

Have Siboni and Shoven fulfilled their Audit Committee obligations to provide “oversight of the integrity of the financial statements” if this mess has ensued on their watch? Of course, it’s the former CFO/CAO Bill Porter, the former CEO Mike Fister, and the current CFO Kevin Palatnik who have been named specifically in some of the lawsuits that have arisen over the recent CDNS stock collapse, not Siboni and Shoven, so clearly the legal attack dogs (some call them ambulance chasers) think they know where the blame should land.

Nonethelss, is competent oversight is in place even now, if the same Audit Committee Members who didn't spot the problems back in Q1 are driving the process of trying to clean up the mis-stated financials?

Speaking of lawsuits …

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Wednesday, October 29th …

On October 29th, Cadence tried to re-establish control of the company’s narrative by issuing several tech-related announcements: Moai used Encounter RTL Compiler & Test to tape out a flash memory controller; Hitachi used Cadence test tools to produce LSI devices “in volume with the lowest number of test escapes or defects achieved by Hitachi to date.”

Although those news releases were clearly timed to coordinate with IEEE’s International Test Conference playing out in Silicon Valley during that week, few may have been listening because starting the next day, October 30th, and continuing through to November 7th, nine different law suits have been announced by nine different law firms from across the land: Maryland, Pennsylvania, Georgia, Okalahoma, Louisiana, Colorado, and California.

Here’s a snapshot of the terminology used in the various press releases:

  • Milberg LLP (Los Angeles, California)

    “The law firm of Milberg LLP has filed a class action in United States District Court for the Northern District of California on behalf of all purchasers of Cadence Design Systems, Inc. common stock during the period between April 23, 2008 and October 22, 2008 (the "Class Period"). The case is entitled Hu v. Cadence Design Systems, Inc., Michael J. Fister, William Porter and Kevin S. Palatnik.”

  • Brodsky & Smith (Bala Cynwyd, Pennsylvania)

    “The Complaint alleges that defendants violated federal securities laws by issuing a series of material misrepresentations to the market, thereby artificially inflating the price of Cadence.”

  • Glancy Binkow & Goldberg (Los Angeles, California)

    “The Complaint charges Cadence and certain of the Company's executive officers with violations of federal securities laws. Among other things, plaintiff claims that defendants' material omissions and dissemination of materially false and misleading statements concerning the Company's business, operations and prospects, caused Cadence's stock price to become artificially inflated, inflicting damages on investors.”

  • Holzer Holzer & Fistel (Atlanta, Georgia)

    “More specifically, defendants allegedly caused Cadence to improperly report approximately $24 million in revenue in the first quarter of 2008 and in the six months ended June 28, 2008 that will not be earned until the later quarters and, therefore, should be properly recognized ratably over the duration of the customer contracts.”

  • Howard G. Smith (Bensalem, Pennsylvania)

    “On October 22, 2008, Cadence shocked investors when it delayed the announcement of its third-quarter financial results and disclosed that Cadence was reviewing, in conjunction with the Company's independent accountants and legal advisors, the recognition of revenue related to customer contracts signed during the first quarter of 2008.”

  • Kahn Gauthier Swick (New Orleans, Louisiana)

    “It was only first on October 15, 2008, that investors learned that Cadence's Chief Executive Officer and four other senior executives had abandoned the Company and, later, on October 22, 2008, that Cadence was reviewing the recognition of revenue related to customer contracts -- the result of which would be the foreseeable restatement of previously reported financial results. As a result of these belated disclosures, Cadence's stock price dropped over 40% -- including a 25% share price decline immediately following the October 22, 2008 disclosures.”

  • Brower Piven (Baltimore, Maryland)

    “Members of the Class will be represented by the lead plaintiff and counsel chosen by the lead plaintiff. If you wish to choose counsel to represent you and the Class, you must apply to be appointed lead plaintiff no later than December 29, 2008 and be selected by the Court. The lead plaintiff will direct the litigation and participate in important decisions including whether to accept a settlement and how much of a settlement .”

  • Federman & Sherwood (Oklahoma City, Oklahoma)

    “The class period is from April 23, 2008 through October 22, 2008. Plaintiff seeks to recover damages on behalf of the Class. If you are a member of the Class as described above, you may move the Court no later than Monday, December 29, 2008, to serve as a lead plaintiff for the Class. However, in order to do so, you must meet certain legal requirements pursuant to the Private Securities Litigation Reform Act of 1995.”

  • Dyer & Berens (Denver, Colorado)

    “The case is entitled Hu v. Cadence Design Systems, Inc., Michael J. Fister, William Porter and Kevin S. Palatnik. The complaint charges Cadence and certain of its current and former officers with violations of the Securities Exchange Act of 1934.”

As a result of these press releases and calls for plaintiffs, I consulted with two acquaintances who are attorneys. I am not a lawyer, but it struck me as strange that nine different lawsuits could be filed to address/redress the same offense. My acquaintances said, if the lawsuits are filed in different courts there actually can be nine different suits.

However, all nine cases have indeed been filed in the United States District Court for the Northern District of California, so it’s my guess and that of my lawyer acquaintances that the courts will require the lawsuits be consolidated. A negotiation often happens, I’m told, whereby several law firms link hands and agree to split the winnings among the groups of plaintiffs they’ve rounded up when the court orders the lawsuits consolidated.

By the way, those same attorney acquaintances suggest it’s pretty tasteless for law firms to go looking for clients in this manner. They use the term ambulance chasers.

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Wednesday, November 5th …

As October morphed into November, those who have become addicted to following the organic conversations on the Yahoo message boards suspected layoffs at Cadence were coming. The highly verbal group of anonymous ‘insiders’ conversing on Yahoo clearly had their ears to the ground and knew something was up.

So, it was not a surprise when another Weary Wednesday dawned for Cadence on November 5th, and the company announced a restructuring -- pink slips for 625 regular employees (12 percent of the workforce), adieu to an unspecified number of consultants and contractors, and restructuring costs of upwards of $70 million. The company said the annual savings resulting from these draconian measures would surpass $150 million, and create a leaner, more nimble Cadence going forward.

Not everybody thought the Board had gone far enough, however. At least one analyst said he had hoped to see layoff levels closer to 20-to-25 percent if management was serious about getting things jump-started back into gear. (Easy for the analyst to say; his mortgage isn’t on the line here.)

Meanwhile, the tone and terminology that I’ve been seeing on the Yahoo message boards since the layoffs officially began on Wednesday, November 5th, has been bitter, often hate-filled, occasionally wistful, and not at all surprising.

The first time I witnessed full-scale layoff myself was in 1997 at a company I was working at then. Although I didn’t lose my job, the numbers of people weeping in the hallways was a stunning revelation to me about how corporate America uses this boom/bust employment practice to keep itself nimble and fit. (That company, by the way, is no longer in business.)

By 1999, I was at a different company and also witnessed the sudden guillotine, weeping in the hallways, and HR ushering people en masse out of the building before they could ostensibly wreak havoc on the IT infrastructure in revenge for their dismissal. I survived that massacre, as well, but learned first hand about the phenomenon of survivor guilt.

By the way, the CEO of that company, in the hour after the layoffs were complete, called the remaining employees into a large meeting and said something like: “Yes, that was very sad, but now we can put such things behind us and work even harder so we won’t have to do that again.” His comments and his attitude struck many at the time as those of a heartless bastard. Many who survived the layoffs left shortly afterwards. (The company was out of business within 2 years.)

By May 2001, I had moved on to yet another employer, but this time was swept up in a layoff myself and ended up in the dustbin with many others. I already knew that weeping was part of the passage, but I’m not the weepy type -- I just wanted to make sure my family’s health insurance would continue until other arrangements could be made. By December of 2001, my CMP-sponsored COBRA was costing my family $1200 a month.

Thanks, CMP. I’ve always remembered you fondly for the many kindnesses you showed to me and my team when we were executed in May 2001. Particularly the part where you called us all and asked us not to bad mouth the company, but instead asked that we reassure anybody worried about the future of CMP and ISD Magazine that it would only be better and stronger now that we had all been laid off. (ISD Magazine was shut down within 12 months of these layoffs.)

Okay -- so, for those who got laid off this past week at Cadence, I say hang in there. Forgive yourself any anger, fury, sense of abandonment, sense of loss, or loathing for your former employer, but look to move on when those emotions subside.

For those who have lost their health insurance, are primary breadwinners for their families, or have had a portion of their self-worth wrapped up in the level of excellence they brought to their work, you have many who empathize with your plight, but you still have a future.

Don’t let the toxic emotions you’re enduring right now destroy your life. Your ex-employer may appear to have had implicit control over your destiny, but they didn’t then and do not now. Be positive, believe in yourself, your family, your intelligence, your talents, and your future. You will get past this. I may not be as optimistic about Cadence itself, but you are not the company and never have been. You’re in business for yourself, no matter who writes your pay check.

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Wednesday, November 12th …

Now that we’ve seen what the last 4 Weary Wednesdays have unleashed at Cadence, the question is what will the next Wednesday bring? There are a number of possibilities:

* First -- The company owes a report to The Street. The “interim office of the CEO” can’t keep investors waiting forever. The leadership at Cadence seems to love Wednesdays; next Wednesday might be exactly the day the restated numbers are stated at last.

(Note: The company announced November 7th, the revenue for Q3 would be approximately $240 million compared with $400 million in Q3’07, part of the difference attributed to the restructuring charge. And, “the anticipated results for the third quarter of 2008 … do not include the impact of any changes to Cadence's financial statements that may arise from the previously announced investigation being conducted by the audit committee.”)

* Second -- There will have to be a response to the plethora of lawsuits listed above. The wrath of the investors who have lost out by way of their CDNS holdings will have to be addressed one way or another. That response will happen with time, certainly not by next Wednesday, but the legal problems do drive home the need for cogent, clear leadership at Cadence.

* Third -- The organization needs a CEO. That could happen by next Wednesday, as well, although I doubt it. There’s even less about the situation at Cadence to attract a talented leader today than there was 3+ weeks ago when Fister et al checked out.

Nonetheless, unless Cadence is sold straightaway -- per the anonymous postings about the future of Cadence posted here in EDA Confidential -- Shoven et al can not continue to serve in an ‘interim’ fashion. The American people have selected a new leader this past week; the Cadence BOD needs show that it can select a new leader, as well.

I’ve unofficially polled lots of people of late as to their suggestions for that leader. Not surprisingly, many would like to see the charismatic Joe Costello back at the helm. I think those people need to see that it’s no longer 1995. Cadence is not the same company it was back then, it’s suffered terribly, and looking back to The Glorious Leader of the past is not (necessarily) the recipe for success in the future.

At least one person has suggested to me that Moshe Gavrielov would have been, and could still lead Cadence. But, if you had Gavrielov’s current role as President & CEO at Xilinx, would you compromise that for a shot at the brass ring at Cadence? Gavrielov’s not asking my opinion (and, quite honestly, neither is the Cadence Board), but surely Gavriolev is far better off staying where he is.

Many have suggested other candidates who also have a history with the company -- Penny Herscher, Lavi Lev, Ted Vucurevich, or Jim Hogan. Although I may have agreed with those names previously, as an outsider with admittedly little knowledge of the storied internal politics at Cadence, I’m now skeptical.

New, fresh, dynamic, positive, intelligent -- these are the characteristics I would vote for in a CEO candidate capable of moving the company forward. Of course, the hard-core naysayers out there keep telling me that nowadays there’s actually nothing new, dynamic, fresh or inspiring about EDA. The whole industry’s plagued with cynical, jaded, dog-eared. aging factions that will not go away. Well, if that’s really the case, let’s just all pack up and go home. Life is too short to spend it munching around with a bunch of depressed, stuck-in-the mud pessimists.

Surely somewhere out there is a potential leader with the imagination and vigor to help Cadence stay afloat and move ahead to realize the potential that still remains in the technology and talent at the company. Can it really be that hard? Some young, dynamic PhD with a vision, a sense of energy, intelligence and a credible work ethic that supersedes the need for conspicuous consumption.

And ... did I mention somebody who doesn't fancy him/herself as the 2nd highest paid CEO in Silicon Valley, for a company that's barely a $1+ billion enterprise?

* Fourth & Finally -- Cadence needs a new vision, and that’s one thing that really can‘t wait past next Wednesday. For those who have been laid off, they may not care; for those thousands who remain at Cadence, however, it does make a difference.

At one time, the company was a broad leader within the EDA community. Has the perfect storm of circumstances, economic environment, political infighting, short-sighted profiteers overriding technologists with the long view -- has all of this together killed the goose that laid the golden egg? Have the Big Winners sucked all of the Big Profits out of the organization, so there’s nothing to lose if the thing goes under?

Sooner, rather than later, those driving the painful changes at Cadence are going to have to bravely step up and craft a message of renewed interest and excitement within the organization. They’ve got to stop the onslaught of Weary Wednesdays and craft many Wickedly Wonderful Wednesdays, if they think anybody’s going to want to hitch their personal future to that of the company.

They’ve just go solve this vision thing, or else …

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Et Fini …

You’d have to be from Milan and/or love opera to know how completely Ted Vucurevich was channeling Pagliacci when he leaped up onto the CDNLive! Stage in the San Jose Convention Center on September 9th.

Wearing a grey wig and waving his arms over head in Nixon-like, V-for-Victory formations, he proclaimed loudly to the 700 people in the audience: “Hi, I’m Mike Fister!”

The audience were momentarily frozen in astonishment at the apparition on stage. Their amazement intensified when the voice of the real Mike Fister blared out of the loudspeakers: “Okay, Ted. You can take off the wig now and tell them who you really are! And to all of you attending CDNLive, welcome to the conference! I wish I could be there, but I’m in Europe because, as you all know, the customer comes first!”

(Perhaps Mr. Fister didn’t get the memo. The people who attend CDNLive! are the customers, aren’t they?)

After Mike Fister’s voice faded from view, Ted Vucurevich took off the wig and launched into what had been billed as the CEO’s keynote address. First, however, he opened with a joke. Pointing at himself, he asked: “What’s the difference between the CTO and the CEO? The CTO doesn’t wear lipstick!”

Fiendishly embarrassing, the far better quip would have been: “What’s the difference between the CTO and the CEO? The CEO’s the one who never shows up for speaking engagements and doesn’t give a rat’s ass if the CTO‘s dignity is sacrificed in the process.”

Surely Ted Vucurevich deserves better, as does all of the EDA Nation. Can somebody call the Cadence Board of Directors and let them know?

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Peggy Aycinena owns and operates EDA Confidential:
peggy@aycinena.com

Copyright (c) 2008, Peggy Aycinena. All rights reserved.