Cadence Takes a Page Out of Microsoft’s Playbook

With the Microsoft (MSFT)-Yahoo! (YHOO) drama fresh on everyone’s mind, Mike Fister and the Cadence (CDNS) Board has finally DONE something that shows a bit of boldness, some imagination, and possibly some courage, even. Cadence has made a hostile takeover bid for Mentor Graphic s (MENT).

Cadence offers to acquire Mentor Graphics for $16.00 per share in cash. Cadence’s all-cash proposal, which is not subject to any financing condition, represents a 30% premium over the closing price of Mentor Graphics common stock on June 16, 2008, the last trading day prior to public disclosure of Cadence’s proposal, a 59% premium over the closing price of Mentor Graphics common stock on May 2, 2008, when Cadence presented the terms of the proposal to Mentor Graphics, and a 46% premium over Mentor Graphics’ average closing price for the past 30 trading days. The transaction price represents a total enterprise value of $1.6 billion on a fully diluted basis, which reflects Mentor Graphics’ net debt of $69 million.

For at least three years now, I have been calling for some sort of consolidation and financial engineering that would reduce the pressure of the price wars plaguing the EDA industry. My last December’s piece, Mentor Graphics: LBO Recommended reiterates this call. It looks like Cadence has taken it upon itself to buy Mentor Graphics, and (a) ease the price war (b) breathe some excitement back into the industry.

Mike Fister’s statement about why he wants to buy Mentor, of course, does not say any of this. Fister says that this will give the customers a better-integrated flow. This is partially true, but not entirely. Yes, Mentor has Calibre, the industry’s best DFM suite, and having that in its portfolio would give Cadence a very significant edge over competition (Synopsys (SNPS), primarily) in its all-you-can-eat bids.

However, Mentor also has a PCB design tool business (over $100 Million) that competes with Cadence. What happens to that? Its market share will amount to over 85%, I suspect, if they combine the two businesses, with Zuken, a Japanese company the only remaining competitor.

In addition, Mentor has now accumulated all sorts of other “stuff” in the less differentiated part of the EDA flow through various recent acquisitions, which are going to be completely redundant.

There are other smaller businesses like Design For Test [DFT; about $60 million] where Cadence and Mentor have no overlap, and Cadence can either keep those businesses, or sell them off.

So, the $1.6 billion that Cadence would be paying would primarily be used for acquiring Calibre, the PCB/FPGA tools business, or possibly  DFT.  What else?

Is it worth the price? It could be, if it unblocks Cadence’s depressed market cap, and helps it win against Synopsys.

In summary, I would say, I like the thinking behind this deal. EDA should not have so many players and this incessant price war. Yes, integration will be hard, but it is becoming acceptable these days to orchestrate large technology company mergers and be able to pull them off successfully.

Whether Wally Rhines likes it or not, Mentor shareholders have just been given a nice opportunity to cash out. I hope Rhines will not throw a Jerry Yang-like tantrum and screw up the deal, but it looks like he may be getting ready to do just that.

If you are not familiar with my past coverage of the EDA industry, I recommend you catch up on some readings:  Mentor Graphics: Target for SilverLake?, Future of EDA, DFM Vision, RTL Hand-off and Predictive Prototyping, Future of EDA: Addendum, I discussed the future of the EDA industry and its structural dysfunctions at length.

I have also written individual stock analysis and competitive strengths and threats reviews for all the major players. You can find those here: Cadence LBO?, Will Magma Die in the Vine?, Cadence Crashes. Now What?, Cadence Languishes On, Magma Squeezed From Both Sides, Mentor, PDF Solutions Climb, Synopsys Better Than the Rest.

Disclosure: None

Comments

[Rahm S]

On balance this merger is going to be mostly suboptimal to the end users, employees at both companies, the larger EDA community, and Cadence shareholders. The real beneficiaries of this merger will be Mentor shareholders and the institutions that finance this deal.

EDA market is $5B+ supporting a $250B semiconductor market. And, it's growing albiet slowly at ~5% CAGR. In my opinion, that market size and growth should be able to support 3 or 4 large players.

From an user perspective, the more choices they have the better the quality of products and services. This merger results in too many product overlaps and diminished product choices which is not going to help the end user.

There will be retrenchment at the combined companies. Internal political battle will stranglehold development. And, the smart folks will simply run to an exit after the merger.

From a larger EDA ecosystem -- EDA startups, which have been the perennial suppliers of new technology will now have one less exit opportunity given that an IPO is all but impossible these days. And, the VCs will be less enthused to invest in EDA startups.

Mentor shareholders will receive a bump in their stock valuation, however I predict Cadence share price will continue to deteriorate since they will not be able to provide a whole lot of value with the merger (other than cost reduction) and Cadence will be unable to aggressively invest in R&D since they have to service the huge merger debt.

Well, the only clear winners may be the financial institutions who finance this deal and the Mentor shareholders.