July 21, 2008
The Summer of Our Discontent: War Games in EDA
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| by Peggy Aycinena - Contributing Editor
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Part 1 – Bombs Away
If you’ve been comatose for the past 5 weeks, wake up and smell the bombshell. Cadence has announced a thirst for Mentor Graphics, and much that defines the EDA Nation now hangs in the balance:
… thousands of jobs, millions of shares, billions of dollars, oodles of ego, and a corner office or two – not to mention a plethora of sales channels, entire product lines, DAC, EDAC, a host of publications, the reputation of various industry pundits, and a bubbling lobster pot full of flaming-red snapping crustaceans.
Oh yeah, and if you’re one of those guys who’s bio includes “… twenty years’ experience in EDA” watch your back, because there ain’t nobody watching it for you. You may be on the verge of being phased out as we move to the next phase of life in EDA.
If Cadence satisfies its thirst, Mentor will cease to exist and Mike Fister will be hailed as a modern day Caesar for conquering the Barbarians to the north. If Cadence fails, however, Fister will be out faster than you can say Hector Ruiz, Wally Rhines will wear the laurel wreath, will shed the public shame of being Mr. Nice Guy, and merriment once again will rule the Shire.
Either way, if Cadence is doing this because they’re pissed off at the small minds and tiny visions endemic to the Provincial Village of EDA – even if they lose the war, they’ll have won the battle. Because by checkmating the industry with this aggressive move, they’re prodding the Village into getting on with things, whether the Villagers like it or not.
Part 2 – War Stories
6/17/08 * CDNS drops a bombshell,
goes hostile on MENT
, and names Deutsche Bank Securities and Davis Polk & Wardwell as financial and legal advisors on the deal.
6/17/08 * MENT says
6/17/08 * Richard Goering immediately
posts a lengthy analysis
of the news that implies both inside access to CDNS and advanced warning of the CDNS-uber-MENT attempt.
6/17/08 * Peggy Aycinena says
CDNS channels Don Corleone
by making MENT an offer they can’t refuse.
6/17/08 * John Blyler notes
6/17/08 * Chris Edwards says the deal’s tantamount to
1+1=1 for CDNS
, will provide negligible financial gain, and may prompt a fit of M&A madness such that SNPS goes after LAVA.
6/18/08 * Sramana Mitra says Fister & Friends are
bold, imaginative, and courageous
; EDA’s been dull for too long and finally a ballsy new Microsoft-like chapter opens.
6/19/08 * Gabe Moretti says there’s
no chemistry between CDNS and MENT
, most guys at MENT will flee an aggregated organization before they’ll put CDNS on their business cards, and MENT should seek solace with LAVA.
6/19/08 * John Blyler laments that
6/19/08 * Bolaji Ojo says
emotion has no place
at the table when CDNS courage is on the menu.
6/20/08 * Mark LaPedus says Wally Rhines may be a lover,
6/27/08 * Gary Smith invokes
reams of icky numbers
that point to an anti-trust nightmare should CDNS acquire MENT, suggests the FTC will care despite stupid suggestions to the contrary, and says if it goes through lotsa CDNS guys will get canned because MENT’s got more up-to-date technology.
6/27/08 * Lou Covey
chides the industry
for forgetting it’s just business.
6/28/08 * Chris Edwards
questions some of Gary Smith’s
lingo, but agrees the deal’s a disaster in the making.
6/30/08 * Peggy Aycinena says it’s time to channel Don McLean and
6/30/08 * MENT hires
7/1/08 * John Blyler says
CDNS should watch its back
lest it be forcibly acquired by AutoDesk or Dassault.
7/1/08 * MENT
in a hostile-turned-amenable takeover.
7/2/08 * John Cooley says 81% of his 279 (mostly anonymous)
have 220 reasons why the CDNS-MENT deal deserves a big fat raspberry. Many among the hundreds say Fister will get rich on the deal.
7/3/08 * Ivy Lessner says
SNPS stands to gain
just by standing by.
7/16/08 * Eric Savitz says Needham’s Richard Valera says CDNS has
lost its luster
, and gets slapped.
7/17/08 * Zacks.com anoints CDNS
7/18/08 * CDNS closes out the month down aproximately 9% since the June 17th bombshell.
7/18/08 * MENT closes out the month up approximately 25% since the June 17th bombshell.
Part 3 – Non-combatants
Dr. N. Venkat Venkatraman is the David J. McGrath Jr. Professor of Management at Boston University’s School of Management. We spoke by phone on July 10th to discuss what happens when Company A makes a hostile move on Company B. I asked him if the FTC is a real or imaginary threat, given such a move might reduce competition in an industry.
Venkatraman said, by and large today the FTC is allowing local [domestic] companies to merge “if there is a competitive alternative available” on the global market. Even though some might believe the Federal Trade Commission would put the brakes on a Company A/B merger due to the kind of market stats Gary Smith posted on June 27th, the FTC might not prohibit the merger if they perceived it would help create a bigger U.S. company to face the growing “onslaught of global competition.”
However, Venkatraman added, even if the FTC were to approve the merger, Company A might decide not to go forward if Company B had certain types of poison pills written into their governance that became effective in the event of a hostile takeover – things like large cash compensations for board members, executives, and major shareholders of Company B, or the early vesting of stock options for senior executives. The costs associated with such poison pills might eclipse the financial benefits that Company A hoped to garner by the acquisition.
I asked Prof. Venkatraman about the CDNS purchase offer delivered privately to the MENT Board of Directors in April, and rebuffed in May, which triggered CDNS’ public move in June to buy MENT shares directly on the open market.
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.
“As far as DAC is concerned – every conference has a distinct shelf life. There are lots of other conferences that have come and gone. DAC was hot back when Joe Costello was running Cadence, but the industry has changed before our very eyes. EDA is becoming more and more commoditized, and it’s always hard for industries to reinvent themselves when that happens. It’s inevitable that these things happen at this point in the life of an industry.
Part 5 – The Vacuum of War: Bending to the Will of the Mob
So it’s comes down to the question of following the will of the mob, or following the Will of the Mob.
Clearly, there are mobs of people who own CDNS stock and the executives at Cadence need to do what’s best for them, even if it looks incorrect to others. The executives at Cadence should have access to all of the information, confidential or otherwise, needed to come to the proper conclusion as to what’s best for their company in all things – today that means this historic CDNS-MENT deal. However, that doesn’t justify these same executives following this CDNS-MENT trajectory simply to make it look like they’re doing something useful.
So many managers and executives are guilty of just turning the wheels in the organization, because they don’t want to be perceived as doing nothing. So, they go and change things, and tweak things, and revise things, and acquire things in a way that adds absolutely no value to the company. Granted it’s a huge project to coordinate the merger of two large multi-national companies – but for the CDNS-MENT deal, if these things are being done just to look busy, this is a bad thing. Dare I say, even an unethical thing.
Meanwhile, down in the bowels of these companies there are technical people who are doing their jobs, and applying their skills to add true value, to enhance existing products, and develop new ones. At both Mentor and Cadence.
So let’s say the purchase of Mentor Graphics is, objectively and verifiably, a beneficial move for both companies. Let’s say that Cadence buys Mentor and in the process a bunch of redundant functions are eliminated between the two companies and jobs and mortgages are lost, but corporate earnings increase.
But then, let’s say that Cadence is bad about managing the new, larger, more-integrated organization and they don’t get around to resolving the redundancies for a few quarters or even a few years. So moneys are spent that shouldn’t have been spent, but eventually the thing gets done and the newly aggregated company moves forward.
At that point – say 2 or 3 painful years from now – if the purchase has actually increased the value of the company, then you’ll know that The Mob was right, the CDNS Executive Mob that is.
If however, the mob that today is saying No, No, No – the mob of journalists, bloggers, employees, investment guys, etc., the mob of CDNS stockholders, and the mob of most of the MENT folks who seem to be saying No, No, No – then who will end up paying for the blunder?
Meanwhile, the CDNS execs continues to lumber forward into this dark tunnel, beginning the Frankenstein-like process of cobbling together two disparate companies into an ad-hoc, seemingly ill-advised single entity. It may open up opportunity, or it may spell the end of the world, as we know it.
When these 2008 EDA War Games are over, to the victor will belong the spoils. And to the victor, the pleasure of writing the history – a tome entitled either, The Will of the Mob or The will of the mob.
Which one it will be comes down to a single question, and that’s the one of Ownership versus Leadership … always the ultimate question at the heart of every war.
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-- Peggy Aycinena, EDACafe.com Contributing Editor.
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