On June 24th, in response to the activities of Carl Icahn, Mentor Graphics Corporation announced that its Board of Directors has adopted a Shareholder Rights Plan in which one incentive stock purchase right will be distributed for each share of common stock held by shareholders of record as of the close of business on July 6, 2010 (the “Rights”). What Mentor is going through is just one more indication that the EDA industry is ripe for a change in the way it conducts its business.

As widely reported Icahn has acquired, or has the option to buy, about 9.5 percent of the company's stock, according to filings with the Securities and Exchange Commission.
Icahn has taken an activist role in a variety of large, public companies, seeking to squeeze profits out of under-performing stocks by forcing management to restructure or sell parts of their operations.

In his original securities filing on Mentor last month, Icahn said he intends "to seek to have conversations with management ... to discuss the business .... and the maximization of shareholder value." Mentor Graphics has declined to say whether it has met with Icahn.
The Rights are intended to enable the Board of Directors to protect the Company and to allow all of the Company’s shareholders to realize the long-term value of their investment in the Company. The issuance of the Rights is not intended to prevent a sale of control of the Company that is determined by the Board of Directors to be fair, advisable and in the best interests of all the Mentor Graphics shareholders. The Rights Plan provides that, unless redeemed earlier by the Company, the Rights will expire on December 31, 2011.

The Rights will be exercisable if a person or group, or any other person with whom they are acting in concert, without the approval of Mentor Graphics’ Board, acquires 15% or more of Mentor Graphics’ common stock or announces a tender offer for 15% or more of Mentor Graphics’ common stock. Under the Rights Plan, synthetic ownership of Mentor Graphics’ common stock in the form of derivative securities counts towards the 15% ownership threshold, if the investor or group physically owns 5% or more of the common stock.

If the Rights become exercisable, all Rights holders (other than the person or group triggering the Rights) will be entitled to purchase Mentor Graphics’ common stock at a 50% discount. Rights held by the person or group triggering the Rights will become void and will not be exercisable.

It's a defensive maneuver that discourages hostile takeovers by allowing existing shareholders to buy discounted stock if any person or group acquires more than a defined percentage of the company's shares.

Last month, Mentor reported a 7 percent drop in quarterly revenue and sharply higher losses. But the Wilsonville company said it saw good signs in contract renewals and orders.
The performance Mentor's various divisions is quite uneven. During the just concluded DAC, third parties were estimating the potential worth of just one of its products, Calibre, to be in the order of $800 million. The System Division that deals in PCB, cables and harness, and thermal analysis tools, is very profitable, as is the combination of the Simulation and C synthesis products. The rest of the product lines are said to be loosing money.

Unfortunately for Mentor its stock can be said to be quite undervalued. Using the closing price as of Friday June 25th at $9.38 per share, the company is "only" worth a little over $1 billion. This certainly gives credence to Icahn's statement, especially if one considers that Calibre is a very desirable tool, and that the simulation and C synthesis products are not just very successful products in the traditional IC design market, but also dominate the FPGA design market.

It is likely that Icahn will not be deterred by the "poison pill" move from Mentor, which if exercised, will have the effect of devaluing Mentor stock thus critically impacting its ability to borrow money at market rates. He can purchase another 5.4% of the stock before the "shareholder rights plan" can go into effect. At that point all sort of options will be open to Icahn that range from a change of executive management, to forcing Mentor's stockholders to invest more money in a company that will have a very uncertain future at that point.