Synopsys Sitting Pretty in Takeover Bid

SAN FRANCISCO -- Cadence Design Systems'(CDNS Quote - Cramer on CDNS - Stock Picks) hostile takeover bid for Mentor Graphics(MENT Quote - Cramer on MENT - Stock Picks), will likely benefit their mutual chip-software rival Synopsys(SNPS Quote - Cramer on SNPS - Stock Picks).

Mentor shares have risen 23% since the bid was made public June 17, closing Thursday at $15.16. Cadence offered $1.6 billion, or $16 a share in cash, a 30% premium over Mentor's June 16 closing price.

The bid comes at a critical time for Mentor contract renewals, with a sizeable number expected in the last half of the year. Uncertainty about Mentor's future may spur semiconductor makers to look to Synopsys for chip-design tools.

After rejecting the bid, Wilsonville, Ore.-based Mentor announced Monday it had hired Goldman Sachs and Merrill Lynch as advisors. But a merger, which would give Cadence 85% to 100% of the market for several software tools, may have difficulty clearing federal scrutiny.

Cadence shareholders have driven down its stock by 16%, to close Thursday at $9.71.

Cadence's tools appear to be losing share to both Synopsys and Mentor. Revenue trends reinforce that market perception. The leader among the three biggest rivals supplying software to the semiconductor-design market, Cadence's top line is expected to shrink 6.4% in 2008, to $1.5 billion, according to Thomson Reuters.

In contrast, Synopsys expects 11.6% annual revenue growth for the comparable period ending in January 2009 and revenue of $1.3 billion for fiscal 2008, which ends in October.

Mentor is also growing as its newer tools for 45-nanometer chips lure clients. Analysts expect Mentor to take in $901 million in revenue for 2008, a modest increase of 2.5%, but rosy next to Cadence's revenue decline.

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