THE TIMES 100 : The Best Performing Companies in California : THE FAST TRACK : Cadence Design Flies High by Helping Firms Automate : The company produces efficiency-enhancing tools that can be too difficult to develop in-house.
Just a decade ago, the very idea of a company like Cadence Design Systems would have seemed ridiculous.
Big electronics companies were beginning to use computers to help design their products, but they considered their electronic design automation (EDA) capabilities a competitive weapon. They might buy a special computer system to help them out, but they would never have relied on third-party software for such an important job.
Yet Cadence has become the fifth-fastest-growing company in California by selling just that kind of software. Profit of $38 million on sales of $231 million in 1990 helped it gain the No. 14 spot on The Times 100 list of the companies with the best return on equity over two years, as compiled by MZ Group of San Francisco.
Joseph B. Costello, the young, ebullient president and chief executive of the San Jose-based firm, is confident that growth will remain rapid enough to make Cadence a $1-billion firm within five years. Top-flight design automation tools are critical for all electronics companies, and they are simply too difficult to develop in-house.
Indeed, the success of Cadence illustrates the changing nature of the computer and computer-chip industries. Rather than vertical integration, the current trend is “dis-integration,” with highly specialized firms focusing on one small piece of the design-development-production-marketing chain.
“Internal computer-aided design groups are declining in number,” Costello says. “We’re better at what we do. We spend $50 million on research and development; it’s very hard to match that inside a company.”
Last year, Costello finally persuaded International Business Machines, Intel and American Telephone & Telegraph--which have long been committed to their own EDA systems--to buy Cadence products.
Cadence is also unusual in that its roots lie in the 1988 merger of two privately held EDA firms, SDA Systems and ECAD Inc.--one of the few successful mergers in the computer business. Costello and his buoyant, communicative attitude are credited by analysts with making that combination work, and two subsequent acquisitions designed to fill specific holes in Cadence’s product line have gone equally well.
Costello, 37, receives high marks for his management style, which mixes Silicon Valley workaholism with a sense of humor. When a proposed public stock offering by SDA had to be withdrawn after the 1987 market crash, the 6-foot-5 Costello took some of the sting out of it by dressing in rags, dousing himself with beer and stumbling through the halls tossing copies of the prospectus from a shopping cart, wailing: “I coulda been a millionaire.”
“Without cultivating personality, he’s become almost a prototypical, positive leader for a high-tech growth company,” says Robert Herwick, an analyst with Hambrecht & Quist in San Francisco. Herwick is optimistic about Cadence, although he cautions that its “growth will have to come internally; there will be fewer opportunities for acquisitions.”
Indeed, the company had a slow first quarter, which Costello attributed to war-induced delays in spending decisions. But he says business seems stronger now, and Cadence should benefit from the recent release of new software that completes its product line.
Although Cadence has traditionally specialized in software for the design of computer chips, the company is challenging market leader Mentor Graphics of Beaverton, Ore., in creating EDA products for developing complete computer systems and other electronics products. It has also been pushing a design “framework” that links pieces of software together to provide an integrated system for designing many different types of products.
“People are saying, ‘Build me a complete design environment for a class of products,’ ” Costello says. “They’re looking to outside experts not just for components, but for solutions.”
