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Synopsys Inc. (SNPS - Analyst Report) recently announced the completion of the acquisition of a privately-held electronic design automation (EDA) company, Ciranova. The company largely works on delivering productivity improvements in custom integrated circuit (“IC”) design. Specifically, Ciranova limits the time and effort needed to develop transistor-level layouts at advanced nodes.

Synopsys intends to utilize Ciranova's technology, which to speed up enhancements in its custom IC solutions. The latter’s technology will help the design teams to effectively meet the productivity challenges that arise as a result of complexities in nanometer design.

Strategic acquisitions have always been Synopsys’ plan to strengthen its product portfolio and it is helping the growth strategy. During 2011, the company made a number of acquisitions. In October, Synopsys completed the acquisition of privately-held electronic design Automation Company; Extreme DA.  Again in January 2012, the company acquired privately-held software maker ExpertIO Inc.

Integration of Extreme DA was easy, as it had the same line of business as that of Synopsys. Not only has Synopsys gained from Extreme DA’s technology, but also from the utilization of its experienced human resources, particularly engineers and sales agents.

Acquisitions might be a prudent way of expanding the company inorganically. However, Synopsys needs to make bigger acquisitions to compensate for the modest growth rate in the industry.

Even if the company finds larger targets to acquire, we believe that funding could be an issue given the recent slowdown in the business, which has impacted results. This apart, the revenue contribution by the acquired companies remains uncertain, as the industry-yet to pick up and generate additional business volume .

Synopsys’ product innovation strategy, the popularity of its time-based license model and its strong cash position are positives. Although Synopsys is gaining traction from new products and acquisitions, we believe these might take a quarter to produce favorable results. Besides, the company is also facing competition from Cadence Design Systems (CDNS - Snapshot Report).

Synopsys currently has a Zacks #2 Rank (short-term Buy rating).

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