July 21, 2008
The Summer of Our Discontent: War Games in EDA
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Venkatraman said that, just as in the InBev takeover of Anheuser-Busch or the Microsoft-Yahoo deal, CDNS and MENT are publicly traded companies. Once Company A makes an acquisition offer in such a case, it is the fiduciary responsibility of the Board of Company B to evaluate the offer and decide whether or not it is in the best interests of the company to accept.
If the Board of Company B decides to reject the offer publicly, then Company A has the right to buy up whatever outstanding shares are available in the market place. Of course, the market will then start bidding up the price of Company B, and Company A must stand ready to bid against all other takers to establish ownership.
[This has happened. MENT is up 25% since the CDNS announced hostilities on June 17th.]
However, Venkatraman also noted that when the stock value of Company A goes down following such a move, it means the Company A investors aren’t too hot on the deal and don’t see the value of the acquisition.
[Possibly has also happened; CDNS is down 9 % since June 17th.]
Venkatraman said that by examining the publicly available financials for Cadence and Mentor, one might conclude that this move is more like the merger of equals, rather than the acquisition of a smaller company by a larger one: “The question for Cadence is, therefore, if the acquisition goes through what will they do if Mentor employees start to walk out?”
That eventually could seriously impact the ability of the aggregated company to support the product lines and the established customer base, he said. Venkatraman added that Company A must always ask itself if it is pursing an acquisition to buy the talent and resources of Company B, to buy up the technology of Company B, or to buy the customers of Company B. All of these are legitimate business-related motives for an acquisition, he said, hostile or otherwise. However, there are frequently less-admirable, more personal motivations in a hostile takeover related to revenge or industry domination. Those situations are more worrisome, he said.
Venkatraman noted that many hostile take-overs have not panned out; they have not paid back the premium promised by the acquiring company to their investors. It’s possible in the CDNS-MENT case, he said, that the CDNS management may just want to run a bigger firm, which might be a rational choice if results of the merger produce an approximately $3 billion company from combining the two companies.
However, if there are less rational reasons for the hostile takeover, he said, customers or employees of either Company A or Company B – or anyone else – may decide to write to their senators or to the FTC to complain about various aspects of the merger, particularly expressing fears that such a merger would eliminate competition. The FTC and Senate carefully examine all such communications, and looks even more closely at a hostile situation in the face of an outcry, according to Venkatraman.
Michael Salinger agrees with Prof. Venkatraman. Dr. Salinger is the Everett W. Lord Distinguished Faculty Scholar of Economics, also at Boston University, and past Director of the Bureau of Economics for the Federal Trade Commission. We spoke by phone on July 10th, as well, and Salinger added that not only is the FTC interested in hearing from customers, they also look at the coverage from the press and industry analysts in an attempt to understand the anti-trust implications of a merger or acquisition, particularly in the case of a hostile take-over bid.
I asked Dr. Salinger if the target of a hostile take-over, our Company B, might be put out of business by Company A simply because the Company B customer base may be unwilling to do business with that vendor while the takeover attempt is being sorted out. Prof. Salinger said that is, in fact, a real risk in some cases. He emphasized, however, that there is an aggressive pushback strategy available. Company B can file suit against Company A to establish that unfair business practices are being pursued.
As Dr. Salinger was explaining all of this to me, I thought about the CDNS-MENT deal churning its way slowly across the EDA Nation. I thought…
The management at EDA’s Company B is not stupid and they’ve got access to (hopefully) sophisticated legal counsel. If there was cause for MENT to actually believe that the CDNS hostile take-over attempt is nothing more than a move to put them out of business, then why don’t they bring suit against CDNS for unfair business practices.
Even as I was thanking Dr. Salinger, I was thinking about who I could talk to about the possibility that the CDNS-MENT deal is not all that it appears – that there’s a lot to be gained, and little to be lost for a lucky handful of players on both sides of the fence in this deal. CDNS might be pursuing a target that’s perfectly happy to be a target. Turns out I’m not the only one who thinks this way.
Part 4 – Nobody talks in terms of Blood and Treasure
Of course, you and I both know when something like the CDNS-MENT deal is underway, nobody is free to talk. Absolutely Nobody.
So, following the phone call with Dr. Salinger, I had a following phone call with Nobody, who neither works for CDNS nor MENT, but knows lots nonetheless. I started by asking Nobody if the CDNS-MENT deal is actually going to happen. Nobody took it from there.
“This deal is inevitable, and has been for several years. Mentor’s been lying out there as an obvious target for quite a while and, although it would have been a smarter move several years ago when the Mentor stock was depressed, these things often happen late.
“Will the FTC approve it? Yes, because they’ll fold out the PCB business at Mentor beforehand and then the acquisition will be acceptable. Mostly Cadence wants the Calibre part anyway, and doesn’t care so much about the rest of the company. Of course, the deal won’t pass the first review with the FTC, but nothing ever does. It will definitely pass the second review, however.
“It’s possible that Wally [Rhines] and Greg [Hinkley] don’t like it, but it’s going to happen so everybody should get used to it. They’ve had a relaxed, almost country club like lifestyle in Oregon for quite some time, and that’s going to change. But they’ll both walk away with millions of dollars, so it’s not going to be that painful for them. The entire executive team at Cadence will also make millions.
“As usual, the Big Wigs do fine, while the little guy takes the hit. It’s going to be bloody for the employees of both Cadence and Mentor – some R&D folks from both companies will be kept, while others will be out, some lifers at Cadence will be out, and many folks who perform general business functions in both companies will be highly redundant. They’ll also be out in numbers. Again, this is only happening because Mentor should have been run better. Running a public company is a privilege, not a right. You can’t pursue a country club lifestyle when you’re beholding to the shareholders.
“Probably the only way this deal won’t happen, as currently structured, is if Synopsys and Mentor link hands, but that’s just not going to happen. There’s too much of the NIH, not invented here, mentality at Synopsys.
“And there’s too much bad blood left between Synopsys and Magma for them to join hands and create any real competition that would discourage investors from embracing the Cadence-Mentor deal. Besides, back when Synopsys bought Avanti, and were buying yesterday’s technology, they should have bought Magma instead – back when Magma was much smaller and much less expensive.
“If Aart de Geus wanted to be smart today, ideally he’d go and buy up EVE, Apache, Denali, and other small companies that he could knock off and pay for, for far less than he’d pay for Mentor or Magma. Plus, he’d be getting today’s technology. Because even though everybody knows that Cadence wants Calibre, that’s also yesterday’s technology.
“Meanwhile, just like the Synopsys-Avanti deal, the financial benefits and promised revenue growth of the Cadence-Mentor deal will never materialize. Look at the Oracle-over-PeopleSoft deal, or the AMD-over-ATI deal. If I were a Cadence stockholder, I’d be really pissed at the whole thing. And if I were a user of Mentor’s tools, I’d also be displeased, but Mentor has not been run well. It’s been financially undisciplined, so this acquisition makes sense.
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-- Peggy Aycinena, EDACafe.com Contributing Editor.