Cadence Bids to Acquire a Mentor

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While everyone was watching acquisition dramas unfold in the online search sector and the game software market this spring, there was a lower-profile opera playing out in the field of semiconductor design software.

Cadence Design Systems (Nasdaq: CDNS) placed a bid to acquire rival Mentor Graphics (Nasdaq: MENT) back in the first week of May. The secret bid was for $16 per Mentor share in cash, a 59% premium over the stock's price that day and 30% higher than last night's closing price. But Mentor's board wanted none of that action and turned the offer down.

But Cadence is persistent, and has now taken the offer into the open. The $16-per-share bid still stands, and Cadence CEO Michael Fister sent a softly spoken letter of continued interest to his counterparts at Mentor this morning. The takeover offer has not turned hostile, and the buyer is hoping to come to terms with its target in a peaceful manner.

Mentor's stock is trading at about $15.50 now, close to the takeover bid and 25% above the closing price yesterday. Investors seem to expect Mentor to have a change of heart, and I can't blame them. 

This stock has not been worth $16 a share for any respectable length of time since 2002. The offer from Cadence sounds more than fair, because Mentor's stock has spent nearly six years at lower prices.

It's a stark contrast to Microsoft's (Nasdaq: MSFT) bid for Yahoo! (Nasdaq: YHOO). Yahoo had been trading comfortably in the lower-$30 range for several years, with what looked like a temporary dip in 2007 -- on which Microsoft pounced. Cadence is offering good value for a depressed stock, and the business combination even makes sense. The combined company would have a stronger bargaining position in the chip design market, and could package the somewhat complementary product lines in new ways that make sense to customers.

Let's see if Mentor comes to its senses and agrees. Intel (Nasdaq: INTC), Texas Instruments (NYSE: TXN), and the other chip-making heavyweights are bound to see their luck change sometime soon, and it would be a good idea to stand ready to deliver the goods when they come looking for design solutions again.