Mentor’s Final Sale

In the end, Paul Singer did what Carl Icahn couldn’t: Got Mentor sold.

Singer, the hedge fund manager known for taking large positions in companies and pushing for tough changes, breakups or sales, started accumulating shares of the EDA CAD company earlier this year. In September, it was revealed that his company Elliott Management, had bought up 8.1% of Mentor’s stock. Elliott immediately started lobbying for changes.

For Mentor, it could have seemed like a recurring bad dream. The company had been through this before, starting six years ago, when Carl Icahn, himself a famed corporate raider, began acquiring shares and issuing accusations of waste throughout the organization.

Icahn’s relationship with Mentor was public and acrimonious. Soon others joined the fray. Everything went under the microscope, from spending on marketing to the personal wealth of the directors. CEO Wally Rhines came under attack for pocketing $65 million from Mentor while the company generated only $113 million in free cash between 2001 and 2011. Icahn even offered to buy the company outright for $1.9 billion, a figure Mentor’s board dismissed as too low.

The board, however, couldn’t outright avoid Icahn and the others, who at their peak owned more than 20% of the company. Instead, they executed a “poison pill” amendment to its bylaws, making a hostile takeover more expensive and risky.

Icahn managed to land three directors on Mentor’s board but never affected the breakup or sale he had hoped for. Mentor bought back half his shares in February for $146 million, and he sold the last of his holdings in May.

Icahn certainly made a pile of money off Mentor. It took Singer, however, to fundamentally change the trajectory of the company.

Upon Elliott’s announcement, Mentor charted a different course. Instead of waging another attempt to fend off the barbarian at the gate, this time it signed on with Bank of America as an advisor to a possible sale. The deal with Siemens came quickly thereafter.

Singer’s stance was Mentor was undervalued by 20%. The price Siemens is paying — $4.5 billion — suggests even he was low.

Siemens was never a stretch as a suitor. As far back as 2011, we suggested the German conglomerate was one of a few companies that made sense to possibly acquire Mentor.

For some involved, the deal completes a circle. Mentor will become part of Siemens PLM, whose president Tony Hemmelgarn is a former Integraph executive. In fact, he was director of sales and marketing when the company spun off its Electronics Division into a wholly owned subsidiary known as VeriBest. Mentor then acquired VeriBest for $19 million in 1999.

It does spell the end to Mentor after 35 years as a standalone company. Founded by a trio of Tektronix engineers — Tom Bruggere, Gerry Langeler and Dave Moffenbeier — in 1981, Mentor added the PCB division through a merger with CADI in 1983. (Just after, Mentor hired the legendary John Cooper, who with partner David Chyan eventually developed the first shape-based router.)

In all likelihood this also means an end to Wally Rhines’ 23-year tenure as head of Mentor. He will be remembered as a steady leader during a period of great upheaval and M&A in EDA. On his watch, Mentor’s revenues grew from $340 million to nearly $1.2 billion. That’s a pretty darn good run.

Less clear is how the rest of the industry will react. Siemens gives Mentor exceptionally deep pockets, a buffer against meddling shareholders, and an extensive market for technology both as a customer and to partner with. The focus on “concept to system” just got a big boost.

By comparison, on the PCB side, the door has been slammed shut on one of the exit strategies for Cadence and Altium. Dassault has been rumored to be kicking the tires on Altium; this could trigger a move. Will PTC, which shares a Boston area neighborhood with Cadence, be compelled to act as well in order not to get shut out of ECAD? As one longtime industry observer noted to me recently, “It’s about the form factor.” OEMs want to design product in its entirety, not in silos of electrical, electronics, mechanical and wire harness. Given that, it’s a safe bet the M&A in ECAD won’t stop with this deal.


All Quiet on the Wilsonville Front

A timely piece from the hometown paper of Mentor Graphics looks at how Carl Icahn has calmed down now that Mentor’s stock price has doubled since he started accumulating shares of the company a couple years ago.

The legendary investor is Mentor’s largest shareholder, at just under 15% of the company. Since he starting buying up shares, Icahn has been vocal about the need for the software company to shed its country club culture. He forced the issue in 2011, successfully getting three of his nominees elected to the company’s board. Last year, Mentor only nominated one of the three, which drew fire from Icahn, but with the stock price up 50% over the past 12 months, all is quiet in Wilsonville.


2 for the Show

The early sense is Carl Icahn will win two seats on Mentor’s board. Given there are eight seats total, and that Icahn and Casablanca Capital — another disgruntled shareholder that is supporting Icahn’s slate — between them own slightly more than 20% of the EDA company’s stock, that seems pretty fair.

Whether it will benefit the company in the long term remains to be seen, of course.

False Statement Plagues Mentor Plea

Mentor today again exhorted shareholders to vote for its current slate of directors and reject activist investor Carl Icahn’s alternate nominees.

In the open letter, Mentor pointed to its improved revenues over the past few quarters, calling it proof that its strategy is working. That alone provides ample evidence the EDA company is headed in the right direction, although it remains to be seen whether Mentor boost sales profitably, which has been Icahn’s point all along.

In the letter, Mentor argues against what it calls Icahn’s desire for a “public sale.” “The linchpin of Icahn’s platform for his nominees continues to be a risky public sale process for [Mentor]. This public sale process might provide Icahn with liquidity, but has the potential for significant value destruction and could derail the business and financial momentum that Mentor Graphics currently enjoys,”  the letter states.

Does Icahn want to be in the software development business? Of course not. And this is a polite way of saying so.

But more troubling is the company’s continued obsession with any alleged regulatory issues of a potential sale.

“It is clear that Icahn is simply continuing to ignore the regulatory obstacles and commercial risks to any transaction with Synopsys or Cadence, despite knowing that the analysis we recently performed shows that there are serious regulatory risks to any transaction with these two companies. He also continues to ignore the destruction of value through loss of customers and employees from any failed process to sell the company.”

Again, Mentor positions the only two logical buyers as Synopsys or Cadence, when in fact, they are perhaps the least logical buyers, for a multitude of reasons.

This line of argument is, at best, disingenuous*. As we’ve noted before, Cadence is heavily in debt and already made one failed play at Mentor, a move that helped cost then-CEO Mike Fister his job. Synopsys has shown little taste for PCB tools over the years and has made no indications it is at all interested now.

So who else would be potential buyers? In no particular order:

  1. National Instruments is coming off a record quarter, and has one of the best balance sheets in EDA today, with $385 million in cash and no debt. It is slightly larger than Mentor overall, but it would certainly be large enough to absorb the latter’s PCB unit.
  2.  Mechanical and PLM software developer PTC also is slightly larger than Mentor. It acquired Ohio Design Automation in 2004, giving it a small inroad to EDA. With its Winchill and Pro-E suites, it has a dominant place in MCAD. Given that some ECAD vendors are trying to extend into the MCAD space, it stands to reason PTC might see the value in going the other way.
  3. Siemens clearly has both the financial girth and potentially the general interest. The conglomerate has a huge stake in PLM with Tecnomatix and Unicam, and is attacking factory line software as well. By owning the PCB side of the equation, Siemens could hypothetically offer manufacturers a single solution encompassing ECAD, PLM and traceability, without the need for machine translators at pick-and-place and test, for example. (This would not happen overnight, if ever, of course.) As for its financials, well, it was the world’s third largest electronics company in 2010, after H-P and Samsung, according to Forbes, with $103 billion in sales.

I’m looking at this only through the PCB lens, of course. But the universe of potential companies that could both afford and possibly desire Mentor in some shape or form is clearly much larger than two. While Rhines deserves the opportunity to continue to run Mentor without Icahn’s interference, it also would behoove Mentor to stop treating its shareholders as fools, as doing so undermines its rational — and strong — argument for the status quo.

*Disingenuous: not straightforward or candid; giving a false appearance of frankness; “an ambitious, disingenuous, philistine, and hypocritical operator, who…exemplified…the most disagreeable traits of his time”- David Cannadine; “a disingenuous excuse”  (Source:

Spring Bored

To those who are tiring of this spring’s back-and-forth between Mentor Graphics and its two largest shareholders, take note: It should only last about three more weeks.

On May 12, the EDA company will hold its annual meeting, at which time shareholders either will affirm their  faith in management by re-electing the current directors, or will try to grab gold via a different channel by voting in favor of dissident shareholder Carl Icahn’s alternate slate.

Icahn and some other investors have claimed, in no uncertain terms, that they feel Mentor spends too much money on itself and not enough flows back to the shareholders. They believe the design software company would be better off run by a group with a greater stake in the outcome — no current Mentor director holds more than a 0.5% share, while Icahn controls nearly 15%. “Over the past 19 years under current management, Mentor’s share price is down 18%, with zero return for shareholders,” Casablanca Capital, another dissident shareholder, wrote in a letter today. “How can we support a board that is responsible for this underperformance?”

For its part, Mentor today responded with its strongest rebuttal yet, saying that Icahn has no plan, short of selling the company, a move it says would jeopardize customer stability; overrates his own nominees’ qualifications; and distorts Mentor’s track record. Mentor further argues that its stock has beaten that of its main rivals over the past five years.

While the battle has been mostly confined to the boardroom — Mentor’s stock price hasn’t yo-yo’d much since Icahn made a $17 per share offer for the company in February — it’s hard to believe that the potential of new management hasn’t been an ongoing distraction to the company’s thousands of employees. They, too, are likely eager for some relief.

It also should be noted that the two investors that are calling for the board’s heads — Icahn and Casablana — own a little more than 20% of the company. The other 79%+ of voting stockholders have been quiet throughout this tennis match. They are the ones who will decide Mentor’s fate, however. At this point, the company is in their hands.

Icahn’s Next Move?

It comes as no surprise to this blog that Mentor Graphics is rejecting Carl Icahn’s offer to buy the company. After all, Mentor has in the past turned down bids that valued the company at roughly the same amount as did Icahn’s.

But there is a distinctly disengenuous flavor to Mentor’s reasoning. In a statement, the company insists that the company is worth more than Icahn is valuing it. Specifically, it claims, “Our share price has grown by more than 70% over the last year, for a two year aggregate growth of approximately 200%.”

True, that, but what the company fails to acknowledge is that Icahn’s accumulation of Mentor stock is likely the main driver behind the upswing. One year ago, Mentor’s stock was trading at under $8 a share. It’s now almost twice that. During that time, Icahn boosted his holdings from under 5% to almost 15% of the company. The combination of his large purchases and the inevitable ride on his coattails some speculative investors are taking has no doubt strongly influenced that jump in value. Despite a $125 million jump in revenue, Mentor has lost an cumulative $14.2 million over its past three fiscal years: to suggest investors are simply thrilled by its performance is a difficult assertion to prove.

The company also speaks of — but doesn’t elaborate on — regulatory risks that come with Icahn’s proposed buyout. It’s not clear why a sale to its largest shareholder, one who is tellingly not a competitor, would run afoul of SEC or other rules. 

The relationship between Mentor and Icahn has clearly soured. That was predictable: Few companies welcome Icahn’s type of shareholder “interest.” What’s less clear is what happens next. Will Icahn fold his flag and start selling? Or will he redouble his efforts to pressure the company into a sale?

Market Ambivalence

The market, the saying goes, is always right.

And if the market is right, Carl Icahn will not be the next owner of Mentor.

Mentor’s board isn’t leaving anything to chance, announcing via an SEC filing today that it would strongly urge shareholders to support its current directors, and reject dissident shareholder Carl Icahn’s alternate slate.

“The Icahn Entities are attempting to replace your directors, who have supported Mentor’s successful strategy, with nominees who have, in our opinion, preconceived notions of what is right for you and who do not have the collective knowledge, skill and experience of your current board of directors.”

But the voice that counts most is that of the shareholders themselves, and market, for now, is not pushing the stock up. Icahn’s tender offer of $17 per share remains on the table, yet Mentor is trading at just under $15 a share. That suggests the market doesn’t believe Icahn’s proposal will be accepted, or that another bidder will come forward.

That’s probably a good read of the tea leaves: Icahn and his ally, Casablanca Capital, together control just over 20% of the outstanding shares. But no other major holder of Mentor stock has publicly called for changes at the EDA company, and for now it looks Wally Rhines and the rest of the management team will hang on. 

What Icahn Wants

Carl Icahn made it official today, offering roughly $1.9 billion for Mentor Graphics, or $1 a share more than Cadence offered in summer of 2008.

But it’s clear from the seven sentence letter that Icahn has no desire to own the PCB/EDA software company. As he states 

There will be no financing conditions. Furthermore, we will not insist upon providing for a break-up fee in the transaction so as not to provide a roadblock to others who may want to consider bidding higher than our bid.

In other words, “I don’t want to own you. I just want to maximize the cash I can get for you.”

There are three obvious bidders for Mentor: Synposys and Cadence on the semi design business side, and Cadence and Zuken in the PCB space. That said, Synposys has shown no interest in the PCB side, and Cadence has a relatively new CEO who owes his job in part to the bungled attempt of his predecessor to buy Mentor. I can’t see Cadence making much of a play at this time. Zuken has plenty of cash and hasn’t been able to crack open the North American market (its share as of March 2010 was about 5%); this is a prime opportunity.

Given Icahn’s track record, the odds are growing long that the Mentor of 2012 will look much like the Mentor of today.