Tiny Firm Fits Into Giant’s Future : H-P and Eesof Await a Boom

When electronics giant Hewlett-Packard Co. last month agreed to acquire tiny Eesof Inc. of Westlake Village, the deal seemed hardly worth noting.

Terms weren’t disclosed, but 10-year-old Eesof has annual revenue of just over $20 million. Palo Alto-based Hewlett-Packard, a global company best known for its computer printers and minicomputers, has $16.4 billion in annual revenue.

However, the acquisition is infused with significance for H-P, which is bolstering its position in an exploding market. That’s because Eesof makes computer-aided engineering software used to design components in everything from cellular telephones to wireless computer networks to radar and satellite communications.

“The whole area of wireless communications is a boom market, the wave of the future,” said analyst Mona Eraiba at ATI Financial in New York.

Eesof provides highly complex software used in the design of components for high-frequency communications systems. High frequency designates the upper end of the electromagnetic spectrum, including the microwave and radio frequencies used in communications networks.

One of Eesof’s customers is Motorola. The communications giant uses the software to design parts in its cellular telephones and is also using Eesof’s programs in its ambitious Iridium project, a $3-billion-plus plan to build a global, portable cellular telephone network using 77 satellites to transmit signals.

Eesof’s software is also used to create computer models--which are then turned into prototypes--for transistors in amplifiers of AT&T; telecommunications systems. Another customer, Boeing, uses Eesof technology to design electronic systems for the cabins of the new 777 airliner.

Hewlett-Packard, the nation’s third-largest computer maker, is also a leading maker of tools and testing equipment, as well as software used to generate designs for communications systems.

Analysts say the acquisition of Eesof is a smart move because the $1-billion-a-year market for high-frequency design software and test equipment is expected to grow as wireless communications proliferate. Although software accounts for just a tiny fraction of that market, many observers believe it will grow rapidly.

“Eesof is the leading electronic design software company for the microwave sector,” said analyst Robert G. Herwick at investment firm Hambrecht & Quist in San Francisco. “Hewlett-Packard is the leading manufacturer of microwave components.”

Together, Herwick said, the two companies will provide tools to create designs for products that Hewlett-Packard and others can manufacture.

H-P has won praise for aggressively responding to changing markets with new products. As a result, it has generated solid growth despite a weak economy and difficulties in the computer industry at large.

In its fiscal third quarter ended July 31, the company posted a 44% jump in profits to $271 million, while its revenue climbed 23% to $4.96 billion, compared to a year earlier.

With Eesof, H-P will be able to act more quickly in the fast-changing communications market.

“If you don’t get in there in a timely fashion, you don’t get there,” said Jake Egbert, operations manager of H-P’s high-frequency design software operation in Santa Rosa, which will merge with Eesof.

By eliminating duplication between the companies, “we can free up resources to go after things in the wireless market,” Egbert said.

Eesof’s chief executive and co-founder, Charles J. Abronson, said Hewlett-Packard and Eesof had for several years considered themselves rivals in the high-frequency design market, but on closer inspection they found more complementary than competing areas of business.

Every company that has Eesof’s software also uses Hewlett-Packard test equipment, Abronson said. He first approached H-P about a year ago with an interest in acquiring the larger company’s high-frequency test equipment business.

But the discussion soon turned to H-P acquiring Eesof as the companies saw areas of common interest. Both saw their original markets disappear with the decline of defense electronics. Eesof, which generates more than half its revenue overseas, is strong in Europe, while Hewlett-Packard has more high-frequency design customers in Asia.

And in making the transition from defense to civilian markets, both recognized competition from such companies as Cadence Design Systems, a San Jose software concern whose lower-frequency simulation software is also used in communications. Joining forces would help Hewlett-Packard and Eesof broaden their product lines and invest more heavily in them, Abronson said.

But while Jim Solomon, a senior vice president at Cadence, confessed to being initially worried by the Eesof acquisition, he is now confident that both Hewlett-Packard and Cadence are positioned to exploit the growth in communications markets, often by cooperating with each other.

For instance, H-P, Eesof and Cadence all contribute technology for the Iridium project. And there are many other potential customers to whom Hewlett-Packard and Cadence can market their technology as a package, Solomon said.

Such products’ potential is great, he said, because communications systems “tend to have a very long, drawn-out design process fraught with the possibility of making a mistake. There’s a great interest in finding ways to make products more reliable. Both Eesof and Hewlett-Packard are superb in the modeling area.”

Eesof was founded in 1983 by Abronson and Executive Vice President William H. Childs, both 52. The engineers left another company Abronson had founded, a manufacturer of microwave components for radar and communications systems, after it was acquired by Communications Satellite Corp., better known as Comsat. At the time, Childs had the idea of creating simulation software for very-high-frequency circuits and systems, such as military radar.

With the backing of San Francisco venture capital firm New Enterprise Associates, Eesof introduced its first product in 1984 for big defense contractors such as Hughes Aircraft, TRW and Westinghouse. The firms also used Eesof’s software to design microwave components--amplifiers, oscillators, filters and switches--for radar and electronic-warfare systems.

But by the late 1980s, the defense electronics market had dried up and Eesof saw a new future in communications. Today, about 90% of its sales are for commercial communications applications, primarily wireless.

Abronson will leave Eesof when the acquisition is completed this fall, although he will act as a consultant to the company temporarily. Childs will remain as manager of research and development.

The company will be renamed Hewlett-Packard Eesof. Its 170 employees will remain in Westlake Village.