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Mentor Graphics Should Be Acquired or Sold: Carl Icahn COUNTERPOINT

Mentor Graphics Should Be Acquired or Sold: Carl Icahn COUNTERPOINT
by Daniel Nenni on 02-20-2011 at 7:04 pm


Daniel,

On Jan 20th, you criticized that the EDA models are all broken and need to change. Ridiculing Synpsys, Cadence, Mentor and Magma for not agreeing to ‘pay for success’ type of model (some form of royalties).

On Feb 14th, you state thatIcahn doesn’t understand EDA and should stay out. Maybe he is seeing the same issue you have stated. The business models are not correct and do not maximize shareholder returns. Unfortunate for Mentor that over the past x yrs, besides a Cadence hostile takeover attempt, several hedge funds started to become active with Mentor stock. Once this trend started, Mentor became the low hanging fruit with higher visibility and a higher probability for return on their investment. This return might be on short ‘buyouts’ of this funds (pay them to leave) or longer term hostile activities.

Changing business models is a very tricky issue for public companies. All information needs to be disclosed and this can have dramatic affect on a company’s share price. Over the past 10 years, you can see at least 2 cases for Synopsys and 2+ cases for Cadence. Synopsys over this time period did two incremental jumps to a ratable model (about 50% each time and they are consistently stated 85-90% of sales in a given quarter as ratable). But each time they did this, their stock did go down. It was controlled by limiting to just 50% change. Cadence has done several ‘flips’ on ratable vs non-ratable recognition and also mentioned their ‘token/credit card’ approach. Just as with Synopsys, these events were seen as negative by investors and they predicted a lower EPS. Their stock also dove due to this forecast.

So public companies that try to change models have external pressure on stock price and lower stock price can enable/cheapen hostile take overs. So actions that affect stock prices are carefully weighed. Companies that are not willing to go this route will use LBOs or Equity groups to purchase the company (with a huge premium paid to sr mgmt along with the equity group) to take a company private. Once private, changing business models and the results from these are not regularly reviewed by the markets (qtrly). Companies that have the cash to work thru these changes can be very successful. They can change business models, strategies, etc. Freescale did this a few years ago and the LBO saddled them with a huge debt to finance. Rich Beyer came in after the LBO was finalized and has done a remarkable job re-aligning the company for targeted markets. Selling off divisions/product lines that do not fit (reducing large expenses with not so large revenue from these groups) as well as trying to retire portions of this large debt. His last tactic/task is the recent announcement of an IPO for $1+B to resolve the final debt. If successful, he will have taken Freescale and remodeled it for a new market….Do a search on various Freescale press releases over the past 3-5 years and you will see the various actions taken.

There are plenty of other examples of LBOs that have either succeeded or failed. Unsure what % actually are successful with this strategy. This strategy might be as dangerous as remodeling in the public/market eye.

Concerning Carl or anyone else that is external to a given market, they have a new viewpoint (might be naive or just a different thought process on creating value) that may or may not be valid. Look at all the the changes in the recent 10 years…

Apple has revolutionized how content is used (iPhone, iPad, iPod, iTunes) and $’s are derived from this content. They alone have probably the largest disruptor in how music, books, TV and movies are acquired and viewed. Kindle/Nook is another form that allows purchasing via WiFi more books that are automatically download to you machine that can hold 1500+ books.

Twitter, Facebook, LinkedIn are allowing large groups of people to ‘gather’ in areas of common interest (all in parallel….not serial discussions). Facebook is credited (rightfully so) with the recent uprising across the MidEast.

LED lights are being used in any thing from traffic lights to TVs.

RFID trackers is another area that some people pushed for specific applications to reduce the cost of manual tracking. Now these are typically in toll tags used to electronically charge/collect tolls from credit card accounts. Removing toll booths that were unsafe (yes, cars had to stop, pay and then remerge with other cars), added time to a driver’s destination, worsened fuel mpg (slowing down, stopping, reaccelerating), and cost more to staff. Lots of people thinking of new ways to apply technology to current issues…

One negative ‘new’ idea, sub prime loans that made a few people (financial companies and sr mgmt) very rich and undermined the entire economy. Many of these ideas came from established companies wanting to enable/attract a new source of $’s. They also saw the downside and quickly bundled these risky assets into bundles that were sold to other ‘unknowing’ investors. I played golf with one guy that worked at one of these firms. He said it was purchase quickly, re-package and sell fast. Get in, get out and get your commission… we can see where this led the US….

What is common? Many of these people were not in the same field (including Apple that was tied to computing power….Steve Jobs saw a huge opportunity in content management and changed not only the products but also the business models that many others could not see (that were in the business). Jobs/Apple products and business models aligned with each other.

These investor events will cause all companies (even Synopsys, Cadence and Magma) to re-evaluate if they should do something different. I do not think that getting kicked out of a comfort zone is bad. It can cause ‘out of the box’ thinking that might be much better than the current situation. Regardless who leads/manages the company. Only time will tell if everyone is in a better place in a few years.

Complex world out there that behaves more analog than digital.

(Please keep my identity confidential)

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