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
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.
The reason for Cadence's revenue decline is the age of its tools, said industry analyst Gary Smith. The developer is "behind on getting to the 65/45-nanometer nodes," while other developers are already preparing for 32/22-nanometer chips. Nanometers refer to the size of the smallest features on a chip, as the technology shrinks with each successive generation.
"The question that never gets asked by Wall Street" is why Cadence's original products are no longer state of the art, Smith wrote recently in a harsh evaluation of the proposed merger.
A buyout will reward Synopsys, as some of Mentor's clients will jump ship rather than stick with the new owner, Smith said in an interview. He observed a similar side effect when Synopsys bought Avant! in 2002.
Cadence executives acknowledged on a conference call June 17 that Mentor's revenue will drop due to "leakage" to competitors. "The cost synergies will be partially offset by potential bookings losses that result, for example, from customer pricing pressure and competition," CEO Michael Fister said then.
Tools developers have lost as much as 70% of business after acquisitions, Smith said. He projects 50% of Mentor's clients will leave because of past dissatisfaction with Cadence's support for tool research. Mentor and Synopsys are clients of
Gary Smith EDA
Synopsys probably will not bid for Mentor, because it stands to gain so much in the near term, as Mentor engineers and customers look for alternatives, Smith said. Synopsys will "gain $200 million to $300 million
in revenue, and they gain Mentor's talent, and they don't have to do a thing."
The situation becomes dire as Mentor heads into negotiating season, with an unusually large number of contracts up for renewal this year. Many customers will sit on the sidelines until merger talks play out.
While sell-side analysts have tended to endorse a merger, Smith said they do not see the antitrust implications that may prevent it or necessitate spin-offs of the technology Cadence wants.
But analysts do question the merger on antitrust grounds. "Unlike the Synopsys-Avant! transaction ... I can think of at least five areas where you and Mentor currently overlap," Merrill Lynch analyst Jay Vleeschhouwer said on the Cadence call.
Analysts also question Cadence's ability to quickly integrate the two product portfolios, given the large degree of overlap. "It took Synopsys years to get the full benefits of Avant!" Vleeschhouwer said.
Fister cited the company's experience integrating dozens of smaller acquisitions in recent years. Chief Administrative Officer Bill Porter responded, "It will take time to integrate the products, but it has long-term benefits for customers." But executives declined to elaborate on how it would deal with any special conditions attached by regulators, such as spin-offs.
Of 22 product categories, the two companies have market dominance in 10, according to Smith. In two categories, they had 100% of the market in 2006, while two more gave them 84% to 85%. In six other categories, such as printed circuit board tools, a merger would give Cadence 58% to 84% of the market.
In newer vertical markets, Mentor has said its contracts with Ford and others will become more lucrative as car brands require their supply chains to adopt Mentor software.
That vertical market success is a key reason Mentor is now fending off Cadence's offer. Cadence executives cited its software for the automotive and aerospace industries as big incentives to merge.