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Cadence Design Looks to Rebuild Leadership

The top brass is out at the design software maker.

SAN FRANCISCO -- Cadence Design Systems' (CDNS) - Get Cadence Design Systems, Inc. Report leadership paid the price for its poor performance this year.

Shares in the design software maker fell 55 cents, or 10.4%, to $4.75 in recent trading after the resignations of Cadence's top executives were announced earlier Wednesday.

The board is "going to have to rebuild the company," says independent industry analyst Gary Smith. "They're going to have to accept that ... they are just going to be a much smaller company."

The stock had tumbled 69% year to date after revenue began to shrink and its takeover bid for a rival failed. In July, Cadence revised its full-year revenue forecast to a range of $1.12 billion to $1.14 billion, from prior expectations for $1.49 billion to $1.54 billion.

San Jose, Calif.-based Cadence posted revenue of $1.62 billion in 2007.

The company said that Chairman John Shoven and board member Lip-Bu Tan would fill the executive void left by the resignations of President and CEO Michael Fister and Executive Vice Presidents William Porter, James Miller and R.L. Smith McKeithen.

CFO Kevin Palatnik will on as part of the interim executive group charged with managing the company until a new chief executive is found.

The company also reaffirmed prior guidance for revenue of $235 million to $245 million and a loss of 11 cents to 9 cents a share, excluding special charges, for the third quarter, which ended in September.

Cadence's board had been arguing for six months over the company's direction under


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veteran Fister, Smith says. Fister joined the company as CEO in May 2004.

Fister shifted the company away from industry-standard two- or three-year contracts to five-year agreements, enabling it to book more revenue up front, Smith says. The shift to longer contracts "insulated their actual earnings for three years. At the end of three years, the bubble popped," he says.

In the electronic-design tools business, Cadence had been a leader. But in recent years, it has fought to hold onto market share against rivals


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Mentor Graphics


, who have pioneered new methods of design as the size of features on chips has shrunk to 45 nanometers and below.

"It's going to be a terrible year" for Cadence, Smith says." That's been apparent since late 2007. What we were wondering is what they were going to do about it."

What Fister did was to launch a hostile takeover bid in June for Mentor. But Cadence backed off Aug. 15 after it could not arrange financing on beneficial terms.

The Mentor bid came too late to save Cadence's faltering 2008 performance and "brought out all the dirty laundry," Smith says.

Smith predicts the board will close down or sell off some product lines and make layoffs.

He says that Cadence could itself become a takeover candidate -- not by a rival firm but by one from the allied mechanical design industry, dominated by

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Some things the outgoing management did were good for the company, Smith notes. "Miller put in a good R&D group," he says.