Mentor Graphics’ ‘marginalized’ size

Contact: Brenon Daly

In knocking down Carl Icahn’s unsolicited bid, Mentor Graphics cited the regulatory difficulties that would likely accompany a combination with either of the two other large vendors of electronic design automation (EDA) software. However, the relative financial performances of the trio show the advantages of consolidation. As is true for most mature businesses, scale matters.

For the most part, the EDA industry has narrowed to three main suppliers: Mentor, Cadence Design Systems and Synopsys. Mentor and Cadence are basically the same size at slightly more than $900m in annual sales, while Synopsys is about half again as large. (It finished fiscal 2010 at $1.38bn in revenue).

Far more important than just top line, however, is the fact that Synopsys has used its size to run more efficiently – far more efficiently – than its smaller rivals, at least when measured by operating margin. (Cadence doesn’t figure into this discussion because it has posted operating losses in each of the past three years.) In Mentor’s recently closed fiscal year, it posted a 6% operating margin – its highest level in three years. That’s all well and good, but we should note that the level is just half the margin that Synopsys currently runs at.

Mentor Graphic’s looming showdown

Contact: Brenon Daly

Lost in the din surrounding Carl Icahn’s recent effort to take out Lawson Software is the fact that the activist shareholder is already much further along with his stirrings against another target, Mentor Graphics. In less than two months, the electronic design automation company is slated to hold its annual shareholder meeting – a get-together where Icahn hopes to replace several board members as a way to spur a sale of the company. It’s shaping up to be a real showdown.

Last month, Icahn floated an offer of $17 for each of the roughly 112 million shares of Mentor, giving the unsolicited bid an equity value of $1.9bn. (Icahn already owns 15% of Mentor, which is nearly four times more than all the company’s directors and executives hold collectively.) Icahn has been joined in his efforts – in practice, if not officially – by another hedge fund, Casablanca Capital, which has a 5% stake in Mentor.

Mentor has told its shareholders to stick with its current board and strategy. In the proxy filed Tuesday, the company takes a swipe at Icahn’s efforts, saying his selections to the board lack ‘the collective knowledge, skill and experience’ of the current directors. Recall that Mentor’s ‘just say no’ defense successfully stymied an unsolicited bid from rival Cadence Design Systems nearly three years ago. Cadence pulled its offer just two months after launching it, but not before blasting Mentor for refusing to even open its books to a prospective buyer. We doubt that Icahn will go away as quickly and quietly if Mentor continues to stiff-arm him

Cadence ends hostilities

Cadence Design Systems unexpectedly yanked its two-month-old unsolicited bid for rival Mentor Graphics Friday, scrapping a deal that would have given the chip design industry some much-needed consolidation. In pulling the $1.6bn all-cash offer, Cadence blasted Mentor for refusing to open its books. According to Cadence, that prevented it from lining up lenders to cover the $1.1bn it was planning to borrow for the deal. Mentor disputed that. It added regulatory review would have likely dragged out the process. Whatever the case, Mentor investors didn’t stick around. Mentor stock plummeted 26% to close at $10.33, compared to Cadence’s offer of $16 per share. For its part, Cadence stock rose 7%. Still both stocks are below the level they were when the dance began.