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Steven Shevick, the general counsel of Mountain View, Calif.-based Synopsys Inc., knows some would call his company crazy for trying to acquire Avant Corp. With Avant’s former executive team in prison or on probation and $222 million in criminal fines and restitution levied against the company earlier this year for trade secrets theft, swallowing Avant looks as attractive as gulping down a hand grenade. Then there’s the related civil suit — in which victim Cadence Design Systems, based in San Jose, Calif., seeks an injunction and more than $1 billion in damages. So before Synopsys agreed to buy the company in a stock-only deal valued Friday at about $778 million, Shevick says, “We wanted to do a sanity check.” First, Shevick had lawyers at New York’s Cleary, Gottlieb, Steen & Hamilton sift through the risks. Then he hired a team of lawyers from Morrison & Foerster, led by San Francisco litigators Jack Londen and Michael Carlson, to kick the tires some more. “This was the most legal-intensive deal that we’ve ever done at Synopsys,” says Shevick. “We wanted to make sure that two sets of independent lawyers have a consensus view.” The consensus, apparently, was to give it a green light. Last week, Synopsys announced it would swap .371 Synopsys shares for each share of Avant. Should Avant back out, it will owe a $45 million termination fee. At the same time, Synopsys announced it had purchased, at a cost of $335 million, an insurance policy that could pay out as much as $500 million to settle the trade secrets suit. If the suit settles for less than $250 million, Synopsys will be refunded the difference. In announcing the deal, Synopsys CEO Aart de Geus acknowledged Avant’s shady past, but said “we have done our homework, and we are convinced that what we are acquiring today is clean.” Shevick says the company wants to settle the suit when the deal closes, sometime in the next three to six months. But that may be easier said than done. The parties haven’t talked settlement in years, Cadence lawyers say, adding that if $500 million is any indication of what Synopsys sees as the value of the suit, future settlement talks are sure to stall. Cadence General Counsel R.L. Smith McKeithen says damages could easily exceed $1 billion. And he welcomes with relish the deep pockets he says Synopsys brings to the table. “In our view, nothing changes about the litigation except we’ve got a bigger balance sheet to go against when we get our recovery,” says McKeithen. “There’s been a huge question about the financial viability of Avant.” He says Synopsys appears to have grossly underestimated its potential exposure. “I think they are trying to minimize to their own constituency the danger of having swallowed a toxic ball,” he says. CHIPS ON THE TABLE Attorneys handling the deal say talk of Synopsys — which produces software used to design computer chips — acquiring Avant had been rumored for years. Doing so would help the company go after competitor Cadence. But it wasn’t until Avant — mired in criminal and civil trade secrets suits since 1995 — resolved the criminal case against it and its top executives that serious talks could begin. In May, Mountain View-based Avant and seven of its employees, including former Avant CEO Gerald Hsu, pleaded no contest to a variety of trade secret theft, conspiracy, concealing stolen property and securities fraud charges. Avant agreed to pay $27 million in fines and $195 million in restitution. Shevick said what followed was months of discussion and analysis to determine what liability Synopsys would be buying by acquiring Avant. “I think a lot of work was done in general terms to make sure Synopsys knows what it’s buying,” says Cleary partner Victor Lewkow. “There’s been lots of work done to identify and get our hands around the risks. That’s always the case — but people took it far more seriously than they sometimes do.” And unlike most deals where litigators are called on to briefly outline pending suits, Lewkow said litigation partner Lawrence Friedman was on center stage. “He was a much more key part of the diligence, he’s been a key part of the team. That’s usually not the case,” Lewkow said. Attorneys at Los Angeles-based O’Melveny & Myers, which has represented Avant in both the criminal and civil proceedings, say their biggest challenge was explaining the litigation and selling it to Synopsys. “My client knew everything there was to know about the litigation,” says O’Melveny partner David Krinsky. “We’ve been living with it, breathing it and sleeping with it. Synopsys had to get comfortable with what the litigation was about.” In addition to figuring out if a purchase was prudent, Synopsys needed its lawyers to figure out how Avant’s troubles affected its price. “In this transaction, what made it unusual was the size, the notoriety of the litigation and the fact that the marketplace put a different multiple on Avant,” says Krinsky. “Most would anticipate it would be lower because of the overhang. That made it a challenging acquisition” for Synopsys, which reported revenue of $680 million for the year ended Nov. 3. Key to the deal was the purchase of an insurance policy to hedge the risk. And Shevick and Lewkow say announcing the policy helps to reassure Synopsys investors and signals the company’s interest in getting back to the negotiating table. “We’d love to settle it at closing if Cadence takes a reasonable approach to it,” Lewkow says. “It’s advantageous to both us and Cadence.” But revealing the pot of insurance money has also served to whet Cadence’s appetite. “It’s not often you get to see the evidence of the other side’s assessment of the value of the case,” says Michael Page, a partner in the San Francisco office of Keker & Van Nest, who represents Cadence. “It’s hardly standard but it happens sometimes,” Cleary’s Lewkow replies. “That doesn’t mean we think it’s $500 million litigation. What’s the purpose of insurance? It’s to deal with the most dire situations.” McKeithen, the Cadence GC, insists the insurance won’t begin to cover it, and points out that any settlement would also need to include agreements to stop using the stolen code in Synopsys products. “The guys who got the bad code are constantly underestimating their exposure that is realistic in this litigation,” McKeithen says, expressing his doubts about Synopsys’ due diligence. “Were they really looking for research or did they have an answer they wanted to get to see this deal go through?” A HAZY FUTURE Complicating the settlement picture is that Cadence may choose to await the outcome of its appeal to the 9th U.S. Circuit Court of Appeals. They want a panel to reverse a district court judge who dismissed trade secret claims predating 1994. U.S. District Court Judge Ronald Whyte of the Northern District of California ruled that a 1994 agreement between the two companies barred that portion of the suit. In considering the appeal, the 9th Circuit recently certified a question to the California Supreme Court asking it to determine whether, under the California Uniform Trade Secrets Act, a claim only arises once with the initial misappropriation or can reoccur with each subsequent use. Shevick says it’s too soon to say whether Synopsys will stick with Avant’s counsel at O’Melveny — which has billed north of $50 million during the years of litigation — or go with Cleary or MoFo. Meanwhile, if the Synopsys deal goes through, it will likely mean the end of the Avant name, tarnished by years of criminal and civil litigation. Shevick says Avant would become a wholly owned subsidiary and renamed Synopsys. He said it’s too early to say how far they’ll go in purging the Avant names from products and marketing materials. “Obviously, the P.R. side of things and the association people have with the name Avant is something we’ve considered,” says Shevick. “I’ll leave that up to the marketing whizzes.”

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