Cadence's Buyout Bounty in Doubt

One analyst sees little value in a private-equity takeover.
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Don't look for

Cadence Design Systems

(CDNS) - Get Report

to score much of a premium if

rumored private-equity buyout talks reach the offer stage.

The stock currently has a consensus price target of $25.50, according to analysts polled by Thomson First Call -- about 11% above its closing price on Friday. Shares were recently up 6% to $24.28.

But one analyst sees the stock as worth far less.

On Monday, HSBC Global Research analyst Rohit Pandey maintained a 12-month target price of $18 and an underweight rating on the San Jose, Calif. company, following a press report that Cadence is in talks to sell to

Kohlberg Kravis Roberts



. He bases the low target price on his analysis of discounted cash flow and on the company's expanding margin.

With the electronic design automation software company's operating margins and bookings renewals close to their peak, "we are not sure what private equity brings to the table here," Pandey wrote.

In addition, Cadence's cost per employee limits its upside potential, Pandey wrote, noting that the company's ratio rose to $209,000 in 2006 from $202,000 in 2005. Pandey estimated that in its most recent first quarter, Cadence's cost per employee was $213,000 -- well above $194,000 per employee for its chief competitor


(SNPS) - Get Report


However, Cadence's costs may have been kept artificially lower, according to a group of Cadence employees who filed a class-action suit in federal court against the company last Wednesday. Network technicians and other support staff claim Cadence fails to pay overtime wages in violation of labor law, according to the firm Lieff Cabraser Heimann & Bernstein, which filed the suit on the employees' behalf.

Cadence didn't respond to questions for comment about the lawsuit or buyout talks.

With Cadence's margins close to peak, Pandey wrote, "private equity would add limited operational value here."