The EDA and semiconductor market is bracing for a bruising battle for control of Mentor Graphics Corp. that could be reminiscent of the messy public debate and acrimonious legal tussle over the future of Yahoo Inc. following its rejection of Microsoft Corp.'s purchase offer.

The comparisons are not exact. For instance, Microsoft held discussions with Yahoo for more than a year before taking its case public to the Internet search engine company's shareholders. Cadence Design Systems Inc., on the other hand, swiftly launched a hostile bid for Mentor Graphics a mere two months after the smaller rival rebuffed its $1.6 billion offer.

The differences in the details between the scuttled Microsoft-Yahoo deal and the proposed Cadence-Mentor Graphics transaction might not matter that much, however. With powerful egos at play on both sides of the Cadence and Mentor Graphics divides, the electronic design automation market might soon be witnessing its most hotly contested take-over bid ever, say industry sources.

"We expect Mentor's management to fight the offer," said Mahech Sanganeria, an analyst at RBC Capital Markets, in a report. "This could get real ugly."

That could be an understatement if Cadence's closest rival, Synopsys Inc., jumps into the fray with an offer that is higher than Cadence's all-cash bid of $16 per share. With a higher market value--$3.5 billion vs. Cadence's $2.8 billion as of June 18--Synopsys could as easily finance an acquisition quest for Mentor Graphics. Furthermore, should an acquisition be pursued, the cash drain on the two companies would

be similar, as Cadence and Synopsys each had about $800 million in the bank at the end of their last respective quarters.

A prolonged tussle for control of Mentor Graphics would be devastating for the company as it would unsettle already skittish customers, many of which have wasted no time looking for ways to consolidate their EDA tool vendor base to increase leverage with the selected partners. With this backdrop--combined with the 30 percent premium offered and the negative press Yahoo CEO Jerry Yang received for spurning Microsoft--Mentor Graphics chairman and CEO Walden C. Rhines eventually might be convinced to close the Cadence deal, according to analysts.

"We think [the Cadence-Mentor Graphics] deal could get done," said Raj Seth, an analyst with SG Cowen Securities Inc., in a research report. "Expect Mentor to hold out for more money, and believe that Cadence could pay $20 per share and still make it work."

Because of Cadence's wobbly state compared with Synopsys, Cadence president and CEO Michael J. Fister could probably be convinced to offer Mentor Graphics' shareholders a higher price for their stake in the company--a scenario Rhines appears to be suggesting. Cadence could also propose significant concessions to Rhines, such as offering him the CEO position at the combined company.

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

"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 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 been calling for more consolidation in the EDA market on the contention that the sector was fast losing pricing leverage with customers while the absence of a large startup 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 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's appetite. He is instead going after a much bigger target with a potentially bigger payoff if the two companies can agree on a deal.

"A combination [of Cadence and Mentor Graphics] would result in an EDA powerhouse, one that would offer a serious competitive threat to Synopsys," said RBC Capital Markets' Sanganeria.

Acquiring Mentor Graphics would reenergize Cadence at a time when its revenue is beginning to decline. The company is forecast to report lower year-over-year sales in 2008 as competition heats up and average selling prices drop off in its market.

"Cadence is in big trouble, and the only way to save the company now is through an acquisition," said Gary Smith of Gary Smith EDA. "They created a bubble in their billing, and they are dropping behind in technology, especially on the IC side." But Smith thinks Magma would have been the better choice for an acquisition. "The synergy would be better with Magma," he said. "Cadence has the front end covered. Magma would bring in the back end."

Analysts said Mentor Graphics' primary appeal for Cadence is Calibre, Mentor's physical verification offering, which RBC Capital Markets' Sanganeria estimates has more than 60 percent of the market. "Neither Cadence nor Synopsys has anything close," he said.

Mentor is not going to fold easily, though. Analysts said the company is still one of the better managed in the EDA market, and its savvy sales force is reputedly an attraction to rivals.

Yet Mentor has been rewarded with lukewarm valuation by investors. Prior to Cadence's public offer, Mentor Graphics' stock price had only recently begun recovering after slumping to a 52-week low of $7.52. Cadence's $16-per-share offer is closer to Mentor's 12-month high of $16.50.

"Whether Wally Rhines likes it or not, Mentor shareholders have just been given a nice opportunity to cash out," said Sramana Mitra, an industry consultant and entrepreneur. "EDA should not have so many players and this incessant price war."

While financial analysts applaud this transaction, huge obstacles are lurking ahead. Cadence will be taking on new debts totaling $1.1 billion to close the acquisition. Combined with its current debt of $500 million, the company that emerges from this transaction could end up with long-term debt as high as $1.6 billion.