After Cadence's Failed Pursuit, Mentor Shows Sparks

Includes: CDNS, MENT
by: The Deal Economy

Chip design software developer Mentor Graphics Corp. (NASDAQ:MENT) shares gained back a little ground Wednesday following news last week that larger rival Cadence Design Systems Inc. (NASDAQ:CDNS) dropped its pursuit of the company, thanks to a better than expected outlook for 2008.

The company announced a second-quarter loss of $17.2 million on revenue of $182.4 million. It also said it expects revenue to grow 4%, to $915 million, this year. That estimate translates to earnings per share, excluding charges, of $1.05 to $1.10, besting Wall Street's estimate of $1.02. Mentor shares responded by climbing 7%, to $11.18, in late-afternoon trading.

Good news is hard to find in the electronic design automation, or EDA, industry. Mentor managed to fend off a $1.6 billion unsolicited takeover offer from Cadence. While the deal would have likely sparked antitrust concerns, some viewed it as a potentially beneficial consolidation move and one that would remove the risk of Mentor remaining an independent third-place player against powerful Cadence and Synopsys Inc. (NASDAQ:SNPS).

Mentor shares sank 26% after Cadence yanked its offer. Cadence quit in large part because a deterioration in its own business made financing terms required to pay for a deal unattractive (and, in a move that certainly was on the minds of smug Mentor execs today, it had to lower its guidance for the quarter).

With the EDA industry suffering overall, the question now is what's next for Mentor. Most likely it will continue chugging along, focusing on building strong positions in EDA niches, like design for manufacturing, or DFM, software. Although Mentor CEO Walden Rhines expressly stated in an analyst conference call yesterday morning that he wouldn't be doing much talking about Cadence's failed takeover attempt, he did note that his company managed to perform well despite all the distraction posed by its would-be acquirer.

He also assured shareholders that Mentor was looking for more ways to boost its market value.

"I want to assure our shareholders that we're working actively with our bankers and advisers to determine the next steps to address enhancement of our share price," Rhines said.

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