Magma Design Automation Inc.

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Magma Design Automation Inc.

5460 Bayfront Plaza
Santa Clara, California 95054-3600
U.S.A.
Telephone: (408) 565-7500
Fax: (408) 565-7501
Web site: http://www.magma-da.com

Public Company
Incorporated: 1997
Employees: 624
Sales: $145.9 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: LAVA
NAIC: 511210 Software Publishers

Based in Santa Clara, California, Magma Design Automation Inc. develops software that computer chip designers use to produce complex integrated circuits (ICs). ICs are interconnected layers of semiconductors—electronic components etched onto thin silicon chips that direct the passage of electrical current. They are used in computers, as well as a variety of electronic devices. Magma's electronic design automation (EDA) products, which improve chip performance and help manufacturers to get new chips onto the market faster, include Blast Create, Blast Plan, Blast Fusion, and Blast Noise. These applications are used by a number of leading firms within the technology and electronics industries, including Broadcom, NEC Electronics, Texas Instruments, and Toshiba. In addition to its California headquarters, Magma has a number of other U.S. locations, including sites in Los Angeles, San Diego, and Orange County, California; Boston; Austin and Dallas, Texas; Durham, North Carolina; and Newcastle, Washington. Internationally, Magma maintains locations in the United Kingdom, Taiwan, The Netherlands, Korea, Japan, Israel, India, Germany, France, China, and Canada.

A SUBMICRON START: 1997–2000

Magma was founded by entrepreneur Rajeev Madhavan and three other EDA industry players: Lukas van Ginneken, Hamid Savoj, and Karen Vahtra. With Madhavan at the helm as CEO, the company raised $115 million in venture capital, which was in ample supply at the height of the dot-com craze.

After training at Bell Northern Research in Canada, Madhavan worked for Cadence Design Systems, performing due diligence reviews of companies that Cadence wanted to acquire. While performing this work, Madhavan was inspired to start his own firm. His entrepreneurial run began in 1992, when he played a role in starting LogicVision Inc., a firm that made chip testing tools. Two years later Madhavan started the EDA firm Ambit Design Systems Inc., which was eventually sold to Cadence for $260 million in cash.

Madhavan's next venture, Magma, was established in response to a pressing industry challenge. During the mid-to-late 1990s, computer chip designs were growing smaller (below 0.13 microns), and chip designers sought ways to fit more circuitry onto individual chips in order to expand their functionality. Existing chip design methods were increasingly ineffective, however, leading designers to engage in lengthy trial-and-error design processes that caused delays in getting new chips to market. According to the company, Magma was founded in April 1997 with a goal of "combining logic design and physical design into a single system to better address emerging deep submicron design challenges."

Cisco Systems Vice-President Andreas "Andy" Bechtolsheim provided the initial funding to start Magma, which established headquarters in Cupertino, California. This capital was immediately used to develop a product that stood out from the offerings of other industry players. As Magma President and Chief Operating Officer Roy Jewell explained in a November 29, 2005 interview with Chris Hall of DigiTimes.com: "What Rajeev did from Day 1 was establish a world-class R&D team, and our idea was to develop a system, built from the ground up, for IC designs that would incorporate processors at 0.13-micron and below. That meant that, in addition to active circuit components, the system looked at interconnects as an active part of the design and one that also had to be optimized."

In the same interview, Jewell shed some light on the company's strategy for acquiring customers, commenting: "We didn't try to take a shotgun approach in penetrating the market; rather, we tried to select some bigger customers that were right at the sweet spot of our technology. We would have some success with a customer and then build out a much broader business as a result of those successes. We were asked to tackle their hardest designs, the ones that were in trouble, and we went in and solved those problems and got those designs to market. From that success came bigger opportunities for engagement with those customers." Magma's first product, a physical design system called Blast Fusion, hit the market in April 1999—two years after the company was founded. In June the technology giant Intel made an undisclosed investment in Magma, and the firms began working to optimize Magma's products for computer workstations that used Intel's processors. Two months later the company formed Magma KK in Shin-Yokohama, Japan, to serve a growing customer base in that country. Magma ended 1999 by gaining its largest customer to date, Fujitsu Microelectronics Inc., which reported great success in reducing design times with Blast Fusion.

While Magma's competitors were all working on the development of similar solutions, Madhavan insisted that his company's offering was superior because it was developed from scratch and was not a combination of existing tools. The company ended its 1999 fiscal year with a net loss of $9.27 million on sales of $226,000.

By 2000 Madhavan had raised approximately $54 million in investment capital and established Magma as a major EDA industry player. During its fiscal year the company recorded a net loss of $33.5 million on sales of $1.45 million. At this time, Magma charged approximately $1 million for a three-year Blast Fusion license. In addition to Fujitsu, the company counted such tech heavyweights as Texas Instruments, Sun Microsystems, and AMD as clients. The company added Japan's NEC IC Microcomputer Systems Ltd. to its client roster in June, signing a multiyear agreement to use Blast Fusion in the development of NEC's next-generation microprocessor cores.

Several other important developments also took place at Magma in June 2000. In addition to unveiling its Blast Chip and Blast Noise products, the company announced that it would merge with Moscape Inc., a technology firm that also focused on the issues chip developers faced when designing smaller ICs. According to the company, Moscape's technology eventually formed "the foundation for Magma's comprehensive design, analysis and implementation solutions." The merger was completed in November, at which time Magma announced that it had secured another $28 million in funding. Together, the two companies had raised a total of $91 million in funding.

LEGAL CHALLENGES: 2001 TO PRESENT

By 2001 the $35 billion semiconductor industry was in a downturn. From one standpoint this was a positive factor for Magma and other EDA firms, because during such times semiconductor companies focus on getting new products onto the market quickly to spark sales. With a net loss of $42.3 million on sales of $11.8 million in 2001, Magma needed this added momentum.

COMPANY PERSPECTIVES

Magma's mission is to create and deliver the best EDA software products and solutions, encompassing IC design from concept to completion, enabling our customers' commercial success.

In May Magma announced its plans to become a publicly traded company. The company hoped that its initial public offering (IPO) would generate $55 million. Some observers speculated that the company's decision to go public came from investor pressure to raise cash. It also was in May 2001 that Magma gave Chief Operat-ing Officer Roy E. Jewell the added title of president. Jewell had joined the company two months before and possessed 12 years of EDA experience.

Although Magma faced stiff competition from big industry players such as Synopsys, Avanti, and Cadence, the company continued to make progress. After the June 2001 release of its Blast Plan design planning product, in October Magma announced that Toshiba America Electronics Components Inc. planned to deploy its software in Toshiba worldwide design centers. In addition, Magma inked a multiyear, multimillion-dollar deal to provide its design software to Broadcom Corp.

In November 2001 the press detailed a breach of contract lawsuit that San Mateo, California-based Prolific Inc. had filed against Magma. Prolific alleged that Magma had failed to pay $3.2 million in royalties for software that Prolific developed for use in Magma's Blast Fusion product. According to the November 19, 2001, issue of Electronic News, in addition to the $3.2 million Prolific sought additional compensation for "'willful, fraudulent, [and] oppressive' behavior, including Magma's allegedly false representations regarding 'the reliability, stability and customer base of Magma software.'"

Its legal entanglement aside, Magma ended 2001 on a high note. The company's November 20, 2001 IPO was a tremendous success, raising $63 million. Magma's shares, which were expected to be in the $9 to $11 range, went as high as $20 on the day of the IPO, closing at $18.

In March 2002, Magma ended its fiscal year on improved financial footing, reporting a net loss of $8.6 million on revenues of $46.4 million. In May of 2002 the editors of Red Herring magazine named the company to The Red Herring 100, an annual ranking that, according to a Business Wire release, "recognizes the top 50 public and the top 50 private companies whose services, business models, products and quality of management define business innovation."

Magma's legal situation with Prolific continued to escalate in mid-2002. After Magma filed a countersuit against Prolific in January over claims that Prolific's software did not work and that the company did not meet certain engineering obligations, Prolific filed an amended complaint in May, suing Rajeev Madhavan and ten other Magma board members and financial stakeholders for $100 million over charges that included breach of contract, libel, and defamation.

According to Electronic News, Prolific and other parties alleged "that Magma prevented the release of the Prolific software while it worked on its own route to the same end, which it called 'super cells,' and also maneuvered for Prolific competitor Cadabra, instead of Prolific, to be acquired for 20 million shares by Numerical Technologies." In the same article, Magma COO Roy Jewell described the lawsuit as "frivolous and an abuse of the legal system."

Other developments in 2002 included the opening of several new facilities, including sites in Taiwan and Korea. Magma ended the year by announcing the availability of its Blast Fusion APX, which offered a number of improvements over the previous version Blast Fusion.

New product introductions continued in 2003, including Blast Create and Blast Rail. That year, Magma went on an acquisition spree, acquiring Aplus Design Technologies in July, followed by Random Logic Corp. and Silicon Metrics in October. The latter acquisition led to the formation of Magma's Silicon Correlation Division. It also was in October of 2003 that Magma underwent a physical expansion by moving to a 130,000-square-foot facility in Santa Clara, California.

Internationally, in 2003 Magma announced plans to open sales and support offices in the Chinese cities of Beijing, Shanghai, and Shenzhen. In addition, the company indicated that it would invest $6.5 million over the following three years in India. In particular, Magma's plans included the establishment of an Indian research and development facility to serve that country's growing EDA market.

Magma's acquisition activity continued in 2004. In April the company completed its acquisition of Mojave Inc. in a cash and stock deal worth approximately $25 million. The acquisition allowed Magma to release a new IC design product called Quartz DRC. Performance milestones could make the deal worth as much as $115 million to Mojave shareholders through 2009.

KEY DATES

1997:: Magma Design Automation is founded by Rajeev Madhavan and several other EDA industry players.
2001:: The company completes its IPO, raising $63 million.
2005:: Magma is ranked second on Forbes's list of the fastest-growing technology companies.

Magma's revenues reached $113.7 million in 2004, up from $75.1 million the previous year. The company's net income also increased, from $3.1 million to $11.5 million. A number of new product introductions were made in 2004, including Quartz Formal and Blast Power. That year, Magma inked a deal with the Chinese Academy of Science to establish a nanotechnology integrated circuit design lab.

Magma garnered recognition from Deloitte Technology in 2004 when the company ranked seventh on Deloitte's list of North America's fastest growing technology firms. Outside recognition continued into 2005. In addition to ranking first on Electronic Business 's list of "Best Small Electronics Companies" for the third consecutive year, Magma was listed second by Forbes on that publication's list of the fastest-growing technology companies.

Another legal entanglement came in September 2004 when Magma's competitor, Synopsys, sued Magma for patent infringement. Synopsys claimed that the patents in question were Synopsys property because Magma Chief Scientist Dr. Lukas van Ginneken, who was named as an inventor on the patents, conceived the inventions while working for Synopsys. Magma denied any wrongdoing in a December 5, 2005 Business Wire news release, claiming that Synopsys put the "inventions into the public domain well before Magma applied for its patents." Magma further asserted that "at least some of the patents' inventions were conceived by employees at Magma, giving Magma an ownership interest in the patents."

By mid-2005 the Synopsys situation had resulted in investors filing a class action lawsuit against Magma, claiming that company insiders concealed the risk the lawsuit presented to investors and, instead of admitting to it, sold 4.4 million shares of Magma stock while it was "artificially inflated," reaping profits of nearly $82.4 million.

In December 2005 the U.S. District Court for the District of Northern California announced that, instead of proceeding with a scheduled hearing, the court would rule on the patent case based on written records provided by each company. As of early 2006, the outcome of Magma's legal situation remained to be seen.

In 2005 Magma's revenue ($145.9 million) increased 28 percent over the previous year. As a whole, the EDA industry was growing at a rate of about 2.8 percent, based on Gartner Dataquest figures. In the aforementioned DigiTimes.com interview with Chris Hall, Magma President and COO Roy Jewell commented on his company's position during the mid-2000s, stating: "Today our customers are mainly in the wireless and consumer spaces, and that means our products have had to evolve. Our tools are still being applied to the most aggressive designs, but that aggressiveness is not simply defined by pure performance. Rather, that aggressiveness is defined by power optimization, by being able to support a number of different functionalities on the same chip."