Channeling Don Corleone ...

Cadence makes Mentor
an offer they can't refuse

by Peggy Aycinena

Hell-bent on acquiring Mentor Graphics, Cadence Design Systems today launched a hostile takeover bid that CDNS execs are talking about like it’s a done deal. If the proposed transaction includes the head of a thoroughbred lodged under some satin sheets, those execs are probably right. Short of that, however, it’s going to remain a hostile attempt, but possibly one that will succeed in the best tradition of gun-to-the-head corporate shoot-em-up.

If this acquisition goes through, be fairly warned: It will be the end of competition in the industry, and the end of any independent conversation about what constitutes good tools and good business models for EDA. I'm predicting it might also be the end of the EDA Consortium and the Design Automation Conference.

Why do I predict such dire results? Because, generally when there's consolidation at this scale in an industry, there's less competitive pressure to succeed, less pressure to produce leading-edge solutions when a lone player begins to owns the market. Mentor and Cadence have significant overlap in multiple areas; there will be fewer offerings in emulation, in board design, and other technologies as well.

But, oh well. Cadence needs some high-profile developments to counter the dismal news they’ve been generating since the first of the year, and with this move they’ve hit on a way to do it. Cadence management is desperately in need of a ‘home run’ and Mentor shareholders may be willing to cooperate.

At the closing bell today, Mentor’s shares had gained a cool 21.5%, opening this morning at just over $12 and ending at $14.98. Cadence is offering $16 a share – very appealing to those long-patient MENT shareholders who’ve been waiting for this ROI, this manna from heaven, for quite some time.

Cadence shareholders, however, seem a tad less enthused. CDNS was down about 6.5% at day’s end, but Cadence management was probably prepared for that. In fact, if you listened in on the Cadence investor webcast this morning, outlining the rationale and financials of the deal, the CDNS guys appeared to be prepared for just about anything the analysts could throw at them.

* Potential FTC and DOJ concerns: "The transaction will receive the necessary approvals." (Cadence CAO Bill Porter)

* Shareholder concerns: "This is a very shareholder friendly proposal." (Cadence CEO Mike Fister)

* Concerns over the price: "We triangulated [some of the analysts’ pricing targets], and we think it’s a full and fair value." (Porter)

* Employee concerns: "An opportunity to bring smart people together is the main focus you have to have in any of these things." (Fister)

* Customer concerns: "Part of our strategy is to have a holistic solution, front to back. Mentor’s is to have distinct point solutions. Our integration will have substantial benefit to the customer." (Porter)

* Concerns the move is counter-intuitive to previously stated Cadence intentions to develop correct-by-construction tooling: "[This move] is totally self-consistent. All we’ll have now is more ability to model abstractions coherently across both companies." (Fister)

* Concerns the merger will take lightyears to reap the benefits, ala the Synopsys-Avanti merger: "We’ve done 36 mergers and acquisitions over the last 10 years … It amounts to a mind match of the teams to focus the respective elements of the portfolios." (Fister)

* Concerns this was a better move last year at this time when CDNS had more value and MENT had less: "The timing is right." (Fister)

The timing may be right for Cadence, but Mentor has apparently been disagreeing since mid-May when the company turned down Cadence’s initial offer, made privately in April. Mentor Graphics reiterated that sentiment in a press release issued this morning, several hours after the Cadence call:

"As we recently indicated to Cadence, we reviewed Cadence's proposal and analyzed both the price proposed and the risks associated with obtaining antitrust approval for a combination between the companies," said Walden C. Rhines, chairman and CEO of Mentor Graphics. "Following this review, we concluded that not only was the price insufficient to support a transaction but that the risks of not gaining regulatory approval were sufficiently high that the ability of the parties to consummate the transaction would be in jeopardy. For these and other reasons, our Board unanimously rejected the proposal."

Undeterred by that rejection, this morning Mike Fister said: "We’d strongly like to do this through negotiation, but we’re going public because they’re not willing … This transaction makes sense, and hopefully the Mentor board and management team will work cooperatively to help us negotiate this. The thing’s financially compelling and I’m committed to getting this done. We’re disciplined and well-advised buyers, and we’re going to quickly negotiate a merger agreement."

Perhaps I should have titled this blog …

Cadence to Mentor: "You're family now!"

June 17, 2008


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