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Did Avant's Gerry Hsu Take Corporate Rivalries Too Far?
By DEAN TAKAHASHI
Staff Reporter of THE WALL STREET JOURNAL
"Use your spies for every kind of business."
-- Sun Tzu, "The Art Of War"
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Even in fiercely competitive Silicon Valley, Gerry Hsu has always stood out. As a manager at two high-tech companies, he was a swashbuckler, urging his employees to "kill the competition" and frequently quoting Sun Tzu, the ancient Chinese master who gave advice on how to win battles in his classic, "The Art of War." "Everybody uses sports and war analogies to death in business," observes Joseph Costello, chief executive officer of rival Cadence Design Systems Inc. "But Gerry Hsu took it literally."
The 51-year-old Mr. Hsu also fought unfairly, according to the district attorney of Santa Clara County, Calif., who on Monday indicted Mr. Hsu, his company Avant! Corp., five other Avant officers who used to work for Cadence and another former Cadence employee who never worked at Avant. The district attorney alleged that Mr. Hsu, Avant's chief executive officer, led a conspiracy to steal trade secrets from Cadence. Mr. Hsu was once the successful co-manager of Cadence's biggest division. The allegations have left Avant's shares in free-fall: They dropped an additional 21% Wednesday -- following a 50% plunge on Tuesday. At the close Wednesday, the company's shares were off $2.69 at $9.81. On Friday, Avant closed at $25.125. Even a solid first-quarter earnings report couldn't help. Avant said Wednesday that net income rose 39% to $6.8 million, or 25 cents a share, from $4.9 million or 19 cents a year ago, while sales climbed to $31.2 million from $23.5 million a year ago. The allegations, if true, would add up to the valley's biggest and longest-running industrial espionage case ever. Three of the defendants -- Stephen Wuu, Eric Cho and Yuh-ZenLiao -- left Cadence in 1991 to form a predecessor company to Avant, called Arcsys Inc., to compete against Cadence. The district attorney charges that when they left, they stole source code for Cadence's popular software for automating chip design. Mr. Hsu, who joined them in mid-1994, is charged with enticing another Cadence engineer to steal code. Cadence made similar charges in a civil suit filed in state court in San Jose, Calif., in late 1995. Mr. Hsu, the other defendants and Avant deny both the criminal and civil charges. Mr. Hsu has argued that Cadence is just trying to ruin a successful rival. Deputy District Attorney Julius Finkelstein, however, says that "this is not a business dispute. Crimes have been committed that deserve to be prosecuted." He adds that the charges are based on a 30-month investigation that yielded "hard physical evidence."
Mr. Hsu had a rocky start in the U.S., coming here from Taiwan 28 years ago with $700 and no command of English. After receiving a master's degree in ocean engineering at the Massachusetts Institute of Technology, he eventually ran two high-tech start-ups, but neither survived. When he joined Cadence in 1991, Mr. Hsu quickly won high marks for energy and intelligence but later showed a tendency to go overboard. For example, he created a special team dedicated to fighting the company he now runs. He called the campaign "AK 47," telling employees the motto stood for "kill Arcsys within 47 weeks." Mark Flomenhoft, a former Cadence manager in charge of the team says that Mr. Hsu put 48 bullet casings on his desk, telling him he should use the last one on himself if the goal wasn't accomplished. "I thought it was cute," recalls Mr. Flomenhoft. "Other people thought it was sick." Two AK-47 team members say part of their mission was to "gather intelligence," such as identifying key contributors to Arcsys's software. They allege they were instructed to find out if every programmer employed by Arcsys has proper immigration status. If not, the team was to notify authorities anonymously, the two members say. In an interview last year, Mr. Hsu said he fights "clean wars, not dirty ones." He said he asked his employees only to do legal information gathering, adding that his tactics were not only aboveboard, but highly successful. Mr. Hsu declined an interview Tuesday. Mr. Hsu said he got his first job offer from Arcsys in December 1993 precisely because "my AK-47 program nearly choked Arcsys to death." Meanwhile, his Cadence division doubled its revenue over the previous three-year period. "I received big bonuses from Joe Costello for my work," he recalled.
Mr. Costello acknowledges that Mr. Hsu initially turned in an impressive performance, but soon began to clash with colleagues over tactics. James Solomon, co-manager of Mr. Hsu's division, said he began to be alarmed by Mr. Hsu's habit of quoting Sun Tzu and portraying business as war. Then Mr. Hsu began firing some of the division's managers, including those who complained about his methods to higher-ups. "People would challenge Gerry, and he was the only one left standing," said Thomas Kadlec, a marketing manager who was fired by Mr. Hsu but later reinstated. "It implied that he had support all the way up." Mr. Costello says he didn't immediately catch on to the furor Mr. Hsu was stirring up in the ranks. But eventually, Mr. Solomon asserted, the hard charger developed a reputation for "getting the job done at all costs." After the AK-47 incident, for example, came another campaign against a North Carolina competitor named Integrated Silicon Systems Inc. Mr. Hsu dubbed the program KISS, for "Kill Integrated Silicon Systems," a Cadence employee says. Mr. Hsu denies he picked the name. The final parting from Cadence came after Mr. Hsu made a key strategic error, taking on Mr. Solomon directly by trying to get Mr. Costello to fire him for incompetence, according to Mr. Costello and others. Mr. Solomon was one of Cadence's most highly regarded executives, and founder of the company that was Cadence's precursor. The clash with Mr. Solomon was precipitated by Mr. Solomon's accusations that Mr. Hsu had traveled to Japan to meet secretly with key customers. "He wouldn't hesitate for a second to do things I considered inappropriate," Mr. Solomon said. This time, Mr. Costello sided with Mr. Solomon. "I was the founder of the company and [Mr. Hsu] couldn't run me out of there," said Mr. Solomon, who is now retired. Mr. Hsu dismissed Mr. Solomon's complaints and said he never directly challenged him, fearing he might "win the battle but lose the war." Mr. Hsu resigned in March 1994 and became Arcsys's CEO in July. According to the Cadence suit, Mr. Hsu returned to form in battling Cadence, telling investment bankers he had formed a "K-team" whose mission was to "kill Cadence." He also met with one of adence's top programmers, Mitsuru Igusa, in August, according to the criminal filing. Mr. Igusa resigned in the fall, and Cadence officials noted a large transfer of data from his computer. In November, police raided Mr. Igusa's house, finding files of Cadence's source code and, according to a police report, evidence that Mr. Igusa was in the midst of deleting Cadence's copyright marks from the code. Mr. Igusa was arrested for theft in August 1995 and charged with six counts of misappropriating trade secrets. He pleaded not guilty. Despite Mr. Igusa's arrest, however, Mr. Hsu and his associates later arranged payments to Mr. Igusa for the stolen code, the criminal complaint says. Cadence says in its civil suit that its private investigators photographed Mr. Igusa receiving an envelope from an Avant executive in Avant's parking lot. Mr. Igusa, who is awaiting trial, declined to comment through his attorney. He is also a defendant in the case filed by the district attorney on Monday. Mr. Hsu said Mr. Igusa "is a friend of ours and we help our friends. But we do not ask them to steal." In response to other questions in a deposition by Cadence's lawyers, Mr. Hsu said, "I can't recall" 396 times, according to Cadence's count. "I have heard of military operations that were clumsy and swift, but I have never seen one that was skillful and lasted a long time."
-- Sun Tzu |
