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Mentor Graphics’ Summer of Discontent

Like a Shakespearian play, every other summer seems to bring a new suitor for Mentor’s affections. The summer of 2010 is no different, though the stakes are getting higher.

Summertime seems to be the season of drama for Mentor Graphics. It was a mere four years ago – in the summer of 2006 – when the Cidadel Financial group made its play for Mentor. Then, in July of 2008, Cadence shocked the electronic design automation (EDA) world by announcing its intentions to acquire Mentor. Now, two years later in the summer of 2010, Carl Icahn is making his big for the Oregon-based EDA chip and board company.

What does Icahn hope to achieve with his growing shares of Mentor stock and options? Three scenarios seem most likely.

First, Icahn may be testing the waters of an industry that he doesn’t yet fully understand. According to some sources within Mentor, this would be analogous to the attempted take-over bid by the Cidadel Financial group in 2006. Proponents of this belief point out that Icahn has recently switched from buying Mentor shares to buying options in order to hedge his bets in the untested EDA waters.

Second, Icahn may hope to force a consolidation between Mentor and another company. Few believe that consolidation among the three major EDA vendors makes sense, e.g., Cadence’s regretful attempted acquisition of Mentor in 2008.

On the other hand, consolidation outside of EDA does make sense. I note that, at roughly the same time Icahn has been buying shares (or, more recently, options) in Mentor, he has also been buying shares in Lawson Software Inc (LWSN). To date, Icahn holds a 12% stake in Mentor and a 9.7% stake in Lawson.

Lawson is a provider of enterprise computer software – a mid-range alternative to the large ERP vendors like SAP and Oracle. Interestingly, Lawson is about the same size (~4,000 employees) and trades in the same range ($7 to $8/share) as Mentor. Therese Poletti at Market Watch notes that Lawson is one of “Oracle’s rejects.”

Mentor recently acquired Valor – a PCB manufacturing company – which move Mentor into the PLM development space. Mentor’s acquisition of a PLM company may make it an even better candidate for a merger with a supply chain company like Lawson.

Last, but not least, Carl Icahn may be buying shares in Mentor to get at cash reserves held by the company.

How will this latest drama play out for Mentor? Me thinketh that ere summer’s end, the full tale will be told.

3 Responses to “Mentor Graphics’ Summer of Discontent”

  1. Hillol Sarkar Says:

    Mentor and Synopsys do have Analog and RF solutions for SoC designs.

    Merging with Agilent may be good technical fit. Mentor has no expereinec with ScM.

  2. Daniel Payne Says:

    John,

    Those were some rational reasons for Icahn buying more Mentor shares.

    If Mentor were to merge with Lawson then the result would likely be a replay of Mercedes and Chrysler, two totally different cultures, two very different market segments, no synergy, no deal, we’re breaking up.

    Mentor has been more aggressive in expanding outside of traditional EDA with their real time OS division, dabbling with IP, auto wire harness, even thermal flow analysis.

    Let’s see if the poison pill from Mentor holds Icahn off long enough that his attention focuses on larger companies in need of more urgent reform.

  3. Gary Dare Says:

    Carl Icahn may be trying to ‘scare’ up the value of MGC’s stock (i.e., JB’s mention of getting ‘at cash reserves held by the company’, i.e., stock buy-back) to take the money and run, as happened at Marvel Comics (acquired by Disney, re-igniting a lawsuit by heirs of Jack Kirby).

    It may also have human resource consequences (halt/freeze new hiring for the recovery, continued headcount reduction – last member of my former product team was ‘retired early’ in late June). But keep in mind that such restraint can also have long term growth consequences (or rather lack thereof) in this so-called recovery and going into the ‘new normal’.

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