Tuesday, June 17, 2008

Cadence bids to buy Mentor Graphics

In this morning's bombshell, Cadence went public with its bid to buy rival Mentor Graphics for $1.6B. The all cash offer at $16.00 per share represents a 30% premium over Mentor's stock at close of market yesterday.

According to Cadence's press release, Cadence CEO Mike Fister first talked to Mentor Graphics' CEO Wally Rhines on April 15 about acquiring Mentor. This met with a cold shoulder from Mentor. According to Cadence, "On May 23, 2008, however, you informed us that, even without any substantive discussion with us or negotiation of our proposal, Mentor Graphics concluded that it did not wish to pursue discussions with us given Mentor Graphics' desire to stay independent. "

Apparently 'no' was not an acceptable answer, so now we get hostile. "It remains our preference to bring Cadence and Mentor Graphics together through a negotiated transaction. However, given Mentor Graphics' refusal to engage in substantive discussions with us concerning our all-cash premium acquisition proposal and the importance of this transaction to both companies' respective shareholders, we have decided to publicly disclose our proposal."

By buying Mentor, Cadence would acquire the industry leader in physical verification, design concept-through-verification and printed circuit board design--all areas where Cadence, for all its strengths, has been lacking. It could also raise serious regulatory issues, since Cadence, Mentor and Synopsys between them control 80% of the EDA market, on which the whole semiconductor industry depends. The acquisition would break up a comfortable oligopoly and replace it with a virtual monopoly in major design areas, leaving Synopsys a distant #2 and Magma off the charts. The third tier of creative EDA players would have virtually no exit strategy left other than acquisition, which would further consolidate an industy that badly needs their competitive juices.

Ex-Intel execs like Mike Fister are famous for being tough players, but in this case I think he's seriously underestimated Wally Rhines. Wally's been in the semiconductor industry almost from the beginning, cutting his teeth at TI, another notably tough shop. Wally's a nice guy in person but tough as nails under pressure. Going public moves this into the domain of a hostile takeover, and that's not going to go over well in Wilsonville.

The gaunlet is down. This is not going to be pretty.

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