July 17, 2008 – In a stunner of a deal that could shake up the EDA industry, Cadence Design Systems has made an unsolicited $1.6B cash proposal to acquire Mentor Graphics — which has tersely rejected it. And as has been the trend lately, the offer is being served up in full view on newswires for public digestion.
In a statement, Cadence execs note that they approached Mentor execs back in April of this year but were brushed off as the firm said it wants to remain independent.
“We believe the combination of Cadence and Mentor Graphics delivers significant benefits to both companies’ shareholders that are simply too compelling to ignore,” said Kevin Palatnik, SVP/CFO of Cadence, in a statement. The deal offers $16/share for Mentor, listed as a 30% premium over its June 16 stock price and 59% since May 2 when the initial proposal was privately pitched.
In addition to the brief PR statement, Cadence execs published the longer version of the proposal — an open letter to Mentor’s board and chairman/CEO Wally Rhines, signed by Cadence CEO Mike Fister. Two months have gone by since the original offer and Mentor has “thus far been unwilling to meaningfully participate” in discussing the proposed offer, Cadence writes. So, “we have decided to publicly disclose our proposal” to shareholders to let them debate what it calls “clear and compelling advantages to a combination of Cadence and Mentor Graphics.” Joining forces would result in “a broader, more fully integrated product and technology portfolio,” Cadence writes, which will help designers face challenges in next-generation product development such as increasing complexity and costs, and the need to optimize and prioritize their efforts in all areas: specification, architecture, design, implementation, verification, and manufacturing.
Responding in a very terse PR later in the afternoon, Mentor confirmed receipt of the unsolicited proposal from Cadence, and reiterated its board’s decision to “unanimously” reject it. “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,” the firm states, while also briefly hinting at unidentified “other reasons” for saying no.
What should we make of the Cadence offer? It “makes no sense whatsoever,” said Gary Smith, of Gary Smith EDA (formerly EDA analyst for Gartner), in an email Q&A with WaferNEWS. “The only people that would support it would be investors wanting to turn a quick buck.” Strategically, Mentor is pushing at the edge of EDA, having cemented its leadership with its recent acquisition of Ponte Solutions. At the time, Gary suggested one of the other three firms (Synopsys, Magma, Cadence) would eventually exit the market — thus, Cadence’s offer could be a defensive move. “Mentor is the company that is leading EDA into the future so they have nothing to gain and everything to lose. Cadence is in trouble so they are looking at this acquisition as a way to survive,” he said. Regardless of the terms, combining the two not only would meet with antitrust concerns, but also “the debt would kill the combined companies — just when they need a heavy R&D investment to get ready for 32nm silicon,” he said.
Even if this proposed Cadence-Mentor combination doesn’t pan out, don’t be surprised to see different deals bubble up in this space. “This is a vibrant industry right now going through a major inflection point,” Smith said. “M&As will continue to be a driving force.”
This is just the latest in a string of M&A activity that’s been playing out in an unusually public way. First there was Axcelis, fighting off advances from its Japanese JV partner Sumitomo Heavy Industries (they are now ” target=”_blank”>quietly back at the negotiation table). And in recent days, Applied Materials and ASMI have been hashing out an unsolicited offer for AMAT to take over ASMI’s frontend businesses — initially just for its ALD/PECVD units, but now the whole thing with help from Francisco Partners.