Mentor says Cadence offer too low

Michael J. Fister of Cadence Design Systems Inc. wants to buy Mentor Graphics Corp. Badly. However, industry observers believe Fister is unlikely to get Walden C. Rhines' company on his current terms notwithstanding the double-digit premium Cadence is willing to pay for Mentor.

In order to close this deal, the largest in recent years for the beleaguered EDA market, Cadence would either have to increase its price — a scenario industry observers consider unlikely but which Mentor Graphics appears to be suggesting — or offer significant concessions to Rhines, chairman and CEO at Oregon-based Mentor Graphics.

In a statement Rhines said Mentor Graphics considered Cadence's proposal and rejected it initially because the company was also concerned regulators might not approve the transaction.

"As we recently indicated to Cadence, we reviewed Cadence's proposal and analyzed both the price proposed and the risks associated with obtaining antitrust approval for a combination between the companies," Rhines said. "We concluded that not only was the price insufficient to support a transaction but that the risks of not gaining regulatory approval were sufficiently high that the ability of the parties to consummate the transaction would be in jeopardy."

Observers have long called for increased consolidation in the EDA market on the contention that the sector was fast losing pricing leverage with customers while the absence of a large start-up base was starving the industry of venture capital and equity shareholder interest.

The proposed $1.6 billion Cadence-Mentor Graphics deal wasn't expected, though.

Many assumed Cadence, which in the last few quarters seemed to desperately need to reinvigorate its weakening sales, would go after much smaller Magma Design Automation Inc.

Apparently Magma wasn't big enough for Fister who is instead going after a much bigger target with a potentially bigger payoff if the two companies could agree on a deal and successfully pull off what analysts contend might be a difficult integration of very different corporate cultures.

"A combination [of Cadence and Mentor Graphics] would result in an EDA powerhouse, one that would offer serious competitive threat to Synpsys," said Mahech Sanganeria, an analyst at RBC Capital Markets in a research report.

Sanganeria, like many other analysts including Gary Smith of market research firm Gary Smith EDA, expects Mentor Graphics to fight the deal. (see: Analyst: Cadence/Mentor merger "a bad idea")

Sanganeria believes Synopsys could even make a counter offer for Mentor Graphics because a successful conclusion of the Cadence-Mentor Graphics merger could pose a major challenge to Synopsys. "We will not be surprised if Synopys offers a counter bid," Sanganeria said. "We expect Mentor's management to fight the offer. This could get real ugly."