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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.

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10 Responses to “Icahn Seeks Mentor’s Acquisition or Sell-off”

  1. Gary Dare Says:

    In Mike Rogoway’s coverage in The Oregonian, he cited EDA industry analyst Gary Smith who made an important point about SGA … in the EDA field, the customer base is limited and the effort is concentrated. There is a good reason for Mentor spending nearly as much as Synopsys, and likely Cadence as well: it is that they are all chasing mostly the same customers.

    As a former customer (now in EDA; I was with Mentor for a little while – disclaimer), the Big 3 would show up for every big initiative hoping to sell into it – and maybe one or two SME’s. So we would go through the cycle of presentations, technical meetings, teleconferences, lunches at least three and sometimes four or five times. The Big 3 also show up at most of the same conferences and trade shows, with the odd exception here and there.

  2. Tweets that mention JB's Circuit » Icahn Seeks Mentor’s Acquisition or Sell-off -- Says:

    [...] This post was mentioned on Twitter by jblyler, VEngineer. VEngineer said: 確かに、SGAが49%は高すぎる。30%でも高いと言われているところもあるのに、その分、R&Dが少ないのかな? QT @TonyChin: 乗っ取り屋さん、Icahn氏が活発に・・・営業コスト面での解説興味深し。 [...]

  3. Lou Covey Says:

    If Mentor was doing it’s job and working on expanding it’s market (which is ultimately the comon sin of the entire industry) it would not be in this situation. The reason Icahn is doing thismismhe sees potential value that is being squandered. EDA likes to think of itself as being above basic business practices, but it is undervalued specifically because of it arrogance.

  4. Gary Dare Says:

    @Lou Covey – when you think of it, Mentor Graphics is better equipped to pursue the EDA 360 concept put forward by Cadence Design Systems, than Cadence itself. :)

  5. John Blyler Says:

    Hi Gary. Agree – the EDA market has traditionally targeted or been restricted to the same customer base. This is one reason why some argue that there can be only 3 major EDA companies. But all of the big 3 – and especially Mentor – are expanding into other markets, which is why I say it’s a delicate time for Mentor.

    I hope the short sighted nature of our investor/banker community doesn’t destroy yet another promising technology company.

    Which leads me into Lou’s comment. I think you have it just backwards, Lou. Mentor is expanding rapidly into the embedded space, the board space, the software space, and several vertical markets (auto, mil-aero and even medical).

    In my opinion, Icahn listened to the wrong advisers when he bought into the EDA space to make a quick buck. He realizes that now, which is why he’s trying to stir up the pot on almost any pretense. In chaos is opportunity.

  6. Gary Dare Says:

    Good day, JB! Thanks for your blog …

    I would agree that Icahn may have found himself in a bit of a pickle and not understood the state of the EDA industry (especially the long purchasing cycle and the behavior of the customer base). When Carl Icahn appeared on the scene last year, I figured that he intended to scare up the value of MENT, which has happened with other of his holdings (it worked for Yahoo, for a while; but let’s not talk about Blockbuster). He then pushed the issue by buying up to the 15% ceiling that MGC’s board set in a poison pill (i.e., “I really think that there’s something there! Really!”). And then, to pull out another cliche, he found himself painted into a corner.

    The only way to get out with a gain, from Mentor’s current stock price, is to sell the entire lot, all at once. Which requires a large buyer able to execute such a transaction and for most in the know, that’s a difficult proposition vis a vis EDA. Selling his holding in pieces, he risks diminished returns or even losses on future tranches as speculation deflates the value of MENT stock barring increase or defended value from the company’s organic progress.

  7. John Blyler Says:

    ” … sell the entire lot … a large buyer.” I think you’re right. Who would buy it? No longer do I believe that a CAD company or even a foundry would do so. This means that the company would need to be sold in pieces, which, as you note, is financiallyl unwise. About the only think Icahn can do is kick up dust in the hopes that the stock will rise in the short term (which it has) or that someone will see the smoke and look for a fire sale. Good observatoins.

  8. Gary Dare Says:

    CNBC’s senior M&A reporter, David Faber, just reported that Carl Icahn has proposed to buy up MGC completely for $17 a share, or $1.9 Billion. He has also waived a break-up fee in the deal (terms not yet disclosed), in case that there are other bidders … which may be what he actually wants (i.e., to buy HIM out at a profit)! :)

  9. John Blyler Says:

    Wow! – Thx Gary. The story just got even more bizarre.

  10. Gary Dare Says:

    You’re welcome! Also, I’m now in the eastern time zone …

    During my Oregon years, one thing that I couldn’t shake was always feeling 3 hours behind ‘everything’ or at least 2 hours behind Chicago …

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