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.

 

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: Dictionary.com)

An Era Ends at Siemens

We have been noting for years that, with almost all the world’s major component placement equipment makers on the block, sooner or later, someone was going to be bought (or shut down).

Today, that day came, as semiconductor equipment OEM ASM said it would acquire Siemens’ Electronics Assembly Systems business unit.

“Acquired” is a delicate term: Siemens will actually pay ASM 29 million euros (roughly$37.9 million) to take the money-losing unit off its hands.

Hong Kong-based ASM thinks it can do what Siemens could never master: develop a profitable channel in Asia. Siemens’ highly engineered machines are  generally expensive relative to its Japanese competitors, and attempts to develop a model whereby it could compete on price as well as technology haven’t yet managed to break the string of several successive quarters of (big) losses.

With tens of thousands of machines in place around the world, Siemens’ place in the pantheon of electronics assembly equipment  manufacturers is secure. Today we salute the legacy of the thousands of its engineers who designed some of the best machines the industry has ever seen, and we hope that under ASM’s management, the unit might again return to its former glory.

Out of Place?

I probably am getting ahead of myself — in fact, I hope I am — but the epic war over the world’s placement equipment business is more and more looking like it won’t include Siemens. The Munich-based OEM, which last year put its electronics assembly business on the block, today announced another difficult quarter.

On the bright side, the placement equipment unit narrowed its first-quarter loss, but sales for Siemens’ discontinued businesses (of which electronics assembly equipment makes up the major share) for the period ended Dec. 31 fell 69% year-over-year.

Perhaps worse, the loss was €15 million on €62 million in sales. Obviously, that’s not sustainable.

I know lots of people at Siemens, and I have tremendous respect for CEO Guenter Lauber. But with only modest improvement expected in the sector this year, it doesn’t look good.