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Carl Icahn’s Effect on Mentor Graphics

The short- and long-term effects caused by activist shareholders like Carl Icahn highlights the dangers of acquisitions based upon non-industry specific financial indicators without an understanding of the industry itself.

Some have noted that Mentor Graphics – an electronic design automation or EDA company – is unique among Carl Icahn’s other holding. EDA is an extremely niche industry in a very technology advanced market space. EDA also has a very constrained customer base with high but typically warranted Selling, General and Administrative (GSA) expenses.

Few claim that Carl understands or even cares about the EDA space. Still, some have reasoned that Mentor might be part of a larger acquisition strategy, e.g., merging Mentor (EDA) with Lawson Software (Product Lifecycle Management or PLM) – another of Carl’s holdings.

Many have wondered about the big picture, especially after the recent recession caused mainly by America’s financial industry. The question that many wonder is if activist shareholders like Carl Icahn really bring long-term value to the “other” shareholders.

Gary Dare, VP of Technical Marketing at Space Codesign, has been following the Icahn-Mentor issue for some time. My thanks to him for calling the following news updates to my attention:

1) Is Carl Icahn Good for Long-Term Shareholders?   

“In terms of Icahn’s effect on other shareholders, we find a significant positive stock price reaction – on the order of 10% – to the announcement of Icahn’s taking a position in the target firm. When examining the subsequent performance of the target firms, we find a very large difference between those firms that were either taken private or acquired (within 18 months) – over a third of the target companies – and those that remained independent. We report that although the acquired group achieved significant positive stock market returns, the firms that remained independent suffered very negative (-60%) returns. Although Icahn’s proposed changes could be responsible, as critics charge, for the performance of the latter group, we suggest that the success of many of these companies in fending off Icahn without enacting most of his proposed reforms is a more plausible explanation. At the same time, Icahn was successful in achieving at least one of his stated objectives in well over half of the cases in which the target companies remained independent. ”

My comments: I believe that this analysis has limited applicability in the EDA space for reasons that I noted earlier. Still, many of us have felt that Carl Icahn’s real goal with Mentor Graphics was to – as Gary puts it – ’scare up’ the value of Mentor’s stock and then cash out. But Ry Schwark, Director of Public Relations at Mentor Graphics, points out a logistical flaw with that reasoning. Ry notes that trade volume for Mentor stock is typically 500k share per day. Carl Icahn now holds 15 percent of Mentor shares/options which would equate to around 16 million shares. As I understand it, if Carl were to sell his shares – being a highly visible Schedule D13 “activist” shareholder – the price of Mentor stocks would presumably fall within the first day of selling 500k shares, leading to reduced stock value on all subsequent days until 16 million shares were sold. I suspect that Carl would find these losses unacceptable, which is why he’s beating the bushes trying to find a buyer for Mentor.

To keep the record straight: Wally Rhines, CEO of Mentor Graphics, reminded me that Carl has not officially offered to buy Mentor Graphics. Rather, Carl has conjectured that, if he were to sell the company, then he’d offer $17/share.

2) Gary Dare: This was reported by Dan Primack of Fortune Magazine on his Term Sheet blog/news letter:

“Golden Gate Capital and portfolio company Infor Global Solutions, has offered to acquire business software maker Lawson Software (Nasdaq: LWSN) for approximately $1.84 billion. The $11.25 per share offer would include a nearly 11% stake in Lawson currently held by Carl Icahn.”

My comments: Last summer, I noted that Mentor moved into the PLM development space with the acquisition of Valor – “Mentor Graphics’ Summer of Discontent”   I surmised that this acquisition positioned Mentor as a “better candidate for a merger with a supply chain company like Lawson,” which might explain Carl Icahn’s interest in Mentor.

Since then, I no longer believe that Carl understands Mentor’s EDA business well enough to have planned for such a merger. Also, I’ve been reminded that no such past union has successfully occurred between EDA and PLM companies. In fact, some of you may remember Cadence Design System’s challenges in the PLM space. Still, the sale of Lawson may yet serve as a useful footnote in the Icahn unfinished chapter of Mentor’s long history.

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