Mentor and Cadence continue to give us things to ponder, but their roads are diverging in more than one way.
Mentor Graphics reported its second quarter operating results and showed a non-GAAP loss of $0.02 and a GAAP loss of $0.19 for its second quarter of 2008. The non-GAAP reporting method gives an idea of how the company is performing in conducting its core business, while the GAAP reporting shows how well the company is managed as a total business. When looking into the future, Mentor projects to be profitable in the third quarter of its operations and continues to project a profitable year.
During the just finished quarter, Mentor acquired the assets of Ponte Solutions and also acquired Flomerics. The first acquisition is expected to further strengthen its presence in the DFM market segment, where it holds a leading position with its Calibre line. The acquisition of Flomerics, a provider of thermal simulation and analysis tools, will immediately aid in improving the company presence in the PCB market, and may in the not too distant future, play a role in the DFM market where heat dissipation is becoming an important issue for IC designers.
End to speculations
Just three working days, and five calendar days, before the Mentor report, Cadence had announced the termination of its efforts to acquire Mentor. This had fueled speculations ranging from an attempt to embarrass Mentor's executive in front of financial analysts and editors, to highlighting the poor performance of Mentor during 2008.
The contents of various chat rooms dedicated to investors during those days has shown to me that the EDA industry has much work still to do to promote itself to the general public. It also showed that most investors like to talk about events even when they do not have a direct financial interest in the companies being discussed or even knowledge of the industry. So much for having faith in the small investor!
The professionals, not surprising, took another position. Jay Vleeschhouwer, of Merryll Lynch, who has covered EDA for years, issued a report the day before the Mentor announcement. I respect his judgment because he has shown a very good understanding of our industry and the leaders of its major companies. In the report Jay issued a buy recommendation for Mentor and an underperform for Cadence. Although the semiconductor industry is sluggish, Mentor is well positioned in key market segments, has kept control on its costs, and is investing in new products development. Nothing has changed negatively between May, when Cadence made its initial offer, and now. Thus Cadence's decision cannot be justified by a deteriorating fiscal condition of Mentor or even a negative change in its projected positions in the market in the next twelve months or so. The real reason is that the cost of the acquisition had increased as I wrote in my blog last week.
Of course I cannot rest my wondering mind when it comes to Cadence. This is not because I have some hidden agenda. It is because its corporate decisions seem to consider stock performance as its primary goal, instead of stock price being the result of good performance in the market it serves.
Cadence has announced that it has committed and additional $500 million to repurchase its own shares in the open market. This is in addition to the $412 million already committed to the same activity. So Cadence plans to spend almost one billion dollars to boost its shares price in the market. But, as Mr. Vleeshhouwer points out, this "would consume most of Cadence's available cash and the estimated 2008-2009 operating cash flow would replenish less than the new authorization."
It is time, once again, to wonder if Cadence is intent on going private by establishing an above average position in treasury stock, or if the move is intended as a defense against a take over offer from an unwanted source. I find it interesting that the amount of money now earmarked for stock re-acquisition is relatively equal to the amount of funds that had been projected to acquire Mentor, and also very similar to the company's projected revenue for FY08. But then again, life might just be a sequence of coincidences.