Icahn Seeks Mentor’s Acquisition or Sell-off
Activist investor Carl Icahn has been very quiet about his reasons for acquiring more and more interest in EDA company Mentor Graphics. That silence has now been replaced with an appearance on CNBC where he and a fellow investor have called for the acquisition or sell-off of the EDA company.
Why generate such attention now? Icahn claims his actions are triggered by Mentor’s sudden change in the date of its annual investor meeting. This means that Icahn has less time to nominate his supporters for election to the company’s board.
Icahn claims that Mentor’s current management is unfit to run the company in part because Mentor’s Selling, General and Administrative (SG&A) costs as a percent of revenue are much higher than the competition – by which Icahn seems to mean Synopsys. The numbers do support this claim with Mentor’s SG&A at about 49 percent and Synopsys’s SG&A at roughly 32%.
But the comparison is a dubious one, at best. In terms of total revenue, Mentor is far closer to Cadence Design Systems than Synopsys. When stacked against a similar competitor like Cadence, Mentor’s SG&A is right in line.
There are several other differences between the two major EDA companies which Icahn and his colleagues choose to ignore. One area of difference is the way Mentor and Synopsys report revenue and bookings, which affects swings in the stock prices. Another difference lies in the basic structure of the two companies. Some have suggested that Mentor’s structure allows the various divisions to have greater freedom to explore and profit from new ventures. Typically, such freedom comes at the price of duplication of some selling, marketing and administrative costs.
But do Carl Icahn and his fellow activist investor, Donald Drapkin of Casablanca Capital, really have legitimate concerns about Mentor’s value to all its investors? After the US has suffered through the last 3 years of near financial collapse caused in large measure by banker and investor recklessness, many technical professional wonder if these concerns are driven more by profit seeking than long-term value for the investment community as a whole.
Would the EDA industry be better served by the disruption caused by yet another acquisition attempt on Mentor or a sell off? (Recall attempts by Cadence (2008) and Cidadel Financial Group (2006) – see below.) EDA companies are in a market that is difficult for business investors to understand. The industry itself is morphing into a new form, as evidenced by the increasing pace of acquisition and the shrinking pool of new start-ups. To meet the global shift to high-volume, low-priced and low-power consumer market, EDA is evolving from a collection of optimized sub-system companies to an ecosystem of tightly integrated system players.
This is a delicate time for the EDA space. The last thing that is needed is a replay of the Wall Street’s recklessness that destroyed an economy while benefiting a select few.