Mentor Graphics Corporation

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Mentor Graphics Corporation

8005 S. W. Boeckman Rd.
Wilsonville, Oregon 97070-7777
U.S.A.
(503) 685-7000
Fax: (503) 685-7985

Public Company
Incorporated: 1981
Employees: 1,900
Sales: $339.8 million
Stock Exchange: NASDAQ
SICs: 7372 Prepackaged Software; 7373 Computer Integrated
Systems Design

Mentor Graphics Corporation is among the world leaders in electronic design automation (EDA), the use of computer software to design and analyze electronic components and systems. Mentor Graphics designs, manufactures, and markets software used in a number of industries, including aerospace, consumer electronics, computer, semiconductor, and telecommunications. Software produced by Mentor Graphics assists engineers in all of these industries in developing complex integrated circuits. Missile guidance systems, microprocessors, and automotive electronics are among the products designed with the help of Mentor Graphics software. Mentor Graphics also offers customers support and training in the use of its EDA systems.

Mentor Graphics was founded in 1981 by a group of young aggressive computer professionals at Tektronix, Inc., the largest electronics manufacturing company in Oregon. The main visionary in the group was Thomas Bruggere, a software engineering manager who had spent several years at Burroughs Corporation before joining Tektronix in 1977. Convinced that he could do better with his own company, Bruggere began assembling a core group of collaborators from among his associates at Tektronix. The group eventually consisted of seven members, who would meet after work to discuss what form a new company should take. Along with Bruggere, the group included Gerard Langeler, head of the Business Unit marketing department at Tektronix, and David Moffenbeier, the company’s manager of operations analysis.

Initially, the company’s pioneering group met in Bruggere’s living room and had only a vague idea of what they would be producing. They decided that the area with the best prospects for success was computer aided engineering, or CAE. Once startup financing was in place, members of the Mentor Graphics team traveled the country interviewing engineers to see what qualities were most important to them in a CAE system. For the company’s initial product, Bruggere and company settled on a workstation that used their own software run on a powerful desktop computer manufactured by Apollo Computer, a Massachusetts-based company also in its infancy. The system was named the IDEA 1000, and represented a substantial improvement over anything already in use in the CAE field.

Once the system was conceived, its production became a race against time. The Mentor Graphics team believed that it was critical to have a working product finished in time to unveil at the June 1982 Design Automation Conference in Las Vegas, the industry’s most important trade show. The IDEA 1000 made a big splash at the conference, and orders for the workstation began to pour in.

Throughout the planning stages, Bruggere and the others expected the company’s principal competition to come from established industry heavyweights like Hewlett-Packard and alma mater Tektronix. However, during Mentor Graphics’ first year of operation, two small companies, Daisy Systems and Valid Logic Systems, emerged in the Silicon Valley with CAE products and proved to be Mentor Graphics’ stiffest competition. For several years the computer press generally lumped the three companies together, referring to them collectively by their first initials, DMV. Two things actually distinguished Mentor Graphics from the others. First, Mentor Graphics bought its computers from Apollo, while the Daisy and Valid Logic built their own hardware. This allowed Mentor Graphics to concentrate on the software side. Secondly, Mentor Graphics developed its software from scratch, in contrast to its competitors, whose software was either a hybrid or an adaptation of existing software packages. Because Mentor Graphics took the time following its conference success to develop its own database package rather than rely on the inferior one supplied by another company, Daisy gained a headstart in the race for customers. From the fall of 1982 until about 1985, Mentor Graphics and Daisy engaged in a brutal war for domination of the CAE business, with nearly every decision made at Mentor Graphics aimed at gaining market share from its rival.

In 1983 Mentor Graphics made its first acquisition of another company, California Automated Design, Inc. (CADI). CADI was developing software similar to Daisy’ s, and the purchase both strengthened Mentor Graphics’ position against its chief rival and nipped another potential competitor in the bud. The results of the acquisition were mixed. Although the purchase gave Mentor Graphics an entrance into a new market segment, the two companies clashed philosophically. The relationship remained strained until 1986, when CADI founder Ning Nan stepped down from his position as vice chairman of Mentor Graphics’ board. A more clear-cut success for Mentor Graphics in 1983 was the introduction of a new product called MSPICE, an interactive analog simulator. The first product of its kind on the CAE market, MSPICE made the process of designing and analyzing the behavior of analog circuits much more efficient.

1983 also marked Mentor Graphics’ move into the international market with the formation of Mentor Graphics (UK) Ltd. Subsidiaries were added in France, Italy, the Netherlands, West Germany, Japan, and Singapore by the following year. By 1984, international sales were accounting for about 20 percent of the company’s total. In September 1984 Mentor Graphics completed the acquisition of Synergy Dataworks, Inc., another young company based in Oregon. Mentor Graphics turned its first profit that year, reporting net income of $8.3 million after losing $221,000 in 1983. In addition, Mentor’s initial public stock offering took place in January 1984. $51 million was raised through the sale of about 3 million shares of Mentor Graphics common stock.

Mentor Graphics’ decision to use hardware produced outside the company in its workstations paid off handsomely in 1985. That year, archrival Daisy missed the deadline for its next generation of computer. Because Mentor Graphics’ industry-standard workstations built by Apollo were experiencing no such delays in upgrading, Mentor Graphics was able to move into the industry lead for the first time. 1985 did not pass without major problems, however. The U.S. electronics industry suddenly encountered its worst recession in 20 years. One result was a glut in the semiconductor market, and semiconductor manufacturers were responsible for a quarter of Mentor Graphics’ business. Mentor Graphics’ net income for 1985 slipped to $7.99 million. The company was spared from worse devastation by the relative health of the aerospace and telecommunications industries, plus substantial growth in the company’s international sales, which accounted for 37 percent of revenue for 1985.

By 1986, Mentor Graphics was releasing new products at the rate of one a month. The company’s international operations continued to grow briskly, consisting by that time of 260 individuals working out of 17 offices in 13 countries. Their share of Mentor Graphics’ revenue had reached 44 percent. One of the year’s highlights was the debut of the Compute Engine Accelerator, a device capable of breaking through the computer bottlenecks often encountered by engineers during complex, multifaceted CAE operations. That year, Mentor Graphics’ revenue reached $173.5 million. With both Daisy and Valid Logic losing money, Mentor Graphics’ position at the top of the CAE industry was more or less cemented. In the broader design automation arena, Mentor Graphics was fourth largest.

The downturn in the computer industry had ended by 1987, and Mentor Graphics was able to increase its profits by 85 percent for the year. Sales were up to $222 million. 1988 was even better, as revenue passed the $300 million mark, and net income grew by another 65 percent. That year, Mentor Graphics was the most profitable among all design automation firms, earning more per share than such major players as IBM and McDonnell Douglas. In March 1988 Mentor Graphics absorbed the CAE business of Tektronix, paying $5 million for a business into which Tektronix had already sunk $200 million in development costs. By the middle of the year, Mentor Graphics controlled about a fourth of the $900 million market for electronic computer-aided design products, whereas the fading Daisy’s share had dropped to 12 percent. About half the company’s business was overseas by this time. Mentor Graphics was making an especially good showing in Japan, where the company held 60 percent of the market for CAE workstations.

Mentor Graphics’ growth continued through 1989. The company’s net income made another big jump, reaching $44.8 million on sales of $380 million. With everything looking rosy, the company embarked on an ambitious new project that year. Mentor Graphics announced its commitment to develop Release 8.0, a new generation of design automation software with capabilities far exceeding those of any existing product. This dream package was a bundle of 50 integrated programs designed into a framework that would allow a customer to move data freely among the various programs. It was hoped that Release 8.0 would cut months off the time required to design a new computer chip.

Several problems in 1990 combined to halt Mentor Graphics’ dominance of the market. As Mentor Graphics’ engineers continued incorporating new features into Release 8.0, the project became increasingly complex. Work on Release 8.0 fell months behind schedule. The company suffered from a faltering economy and customers who stopped buying Mentor Graphics’ older products knowing that 8.0 was to be released soon. At the same time, new competition sprang up from Cadence Design Systems, a five-year-old company that sold only software rather than entire workstations. Whereas Mentor Graphics’ products were essentially a closed system, incompatible with other software packages, Cadence was producing software that could run on a wide range of workstations and design more complex chips. Between the delays in 8.0 and the emergence of Cadence, Mentor Graphics hit a wall.

The company made several changes to protect its position in the newly heated up race for EDA preeminence. One was to strengthen its integrated circuit design capability by acquiring Silicon Compiler Systems, which was integrated as a division of Mentor Graphics. The company also adopted Sun Microsystems hardware as a second platform for its products. Toward the end of 1990, Mentor Graphics reorganized its command structure in an effort to get the 8.0 project back on track. The company was divided into three distinct product groups: Concurrent Engineering, headed by Philip Robinson, a former vice president at Tektronix, the Systems group, led by Langeler, whose previous titles of president and chief operating officer were eliminated, and World Trade, under David Moffenbeier, another member of Mentor Graphics’ core founding group. Bruggere remained chairman and CEO.

One of the most important causes of Mentor Graphics’ ills during this period was its reluctance to adapt to certain changes taking place in the electronic design automation industry. Prior to the 1990s, the bulk of Mentor Graphics’ sales came from complete packages of workstations and software. Around 1991, however, most customers already had workstations they were comfortable with and were interested mainly in purchasing software that could run on whatever hardware platform they preferred.

In April 1991, Mentor Graphics reported a quarterly loss for the first time in its history as a public company. A few months later, the company announced a round of layoffs that eliminated 435 jobs, or about 15 percent of its work force. By the end of 1991, Cadence had passed Mentor Graphics in software revenues. Mentor Graphics finished the year by losing $61.6 million on sales of $400 million. The company’s skid continued into 1992. When 8.0 was finally released early in the year, it performed more slowly than expected, and was plagued with bugs. Mentor Graphics’ stock plummeted, diving as low as 51/4 in October. For 1992, the company’s sales took another major plunge to $351 million, and the company reported a net loss of nearly $51 million.

Mentor Graphics’ struggle to turn itself around continued in 1993. The rivalry between Mentor Graphics and Cadence became fierce, with each company aggressively courting the other’s customers. Cadence won a three-year multimillion dollar contract from Tektronix, who had been a loyal Mentor Graphics customer for years. Mentor Graphics countered by forging a cooperative relationship with Harris Corporation, an early Cadence ally. The company underwent further restructuring in an effort to cut costs. Mentor Graphics still lost money in 1993 ($32 million on revenue of $340 million), but some of its business segments showed signs of recovery. A $17 million contract with Motorola contributed to the company’s slightly improving prospects. The process of changing itself more completely into a software company continued.

In March 1994, Bruggere announced that he was stepping down as chairman to pursue other interests. After a short period during which the company’s day-to-day operations were handled by president and chief executive Walden Rhines, Jon Shirley (a former Microsoft president) was named Mentor Graphics’ new chairman. With adjustments in the company’s approach to its products completed, the leadership at Mentor Graphics hoped that its offerings—once at the cutting edge of electronic design automation—had again caught up with the needs of its customers.

Principal Subsidiaries

Mentor Graphics (Canada) Limited; Mentor Graphics (Finland) OY; Mentor Graphics (France) SARL; Mentor Graphics (Deutschland) GmbH; Mentor Graphics Japan Co. Ltd.; Mentor Graphics (Netherlands) B.V.; Mentor Graphics Finance B.V.; Mentor Graphics (Singapore) PTE. Ltd.; Mentor Graphics (Scandinavia) AB; Mentó Graphics (Schweiz) AG; Mentor Electronic Design SA; Mentor Graphics (Taiwan) Co. Ltd.; Mentor Graphics (UK) Ltd.; Mentor Graphics (Denmark); Mentor Graphics Far East Ltd. Pte.; SDL International, Inc.-Domestic; European Development Center, N.V.; Model Technology Incorporated; Anacad Computer Systems GmbH; CheckLogic Design Systems, Inc.