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Mentor Moves On Quickturn Wilsonville, Ore.--A week after AlliedSignal targeted connector leader AMP for a potential hostile takeover, the No. 4 electronic design automation (EDA) software supplier Mentor Graphics disclosed a $216 million unsolicited bid to buy out fellow EDA firm, Quickturn Design. Quickturn shares shot up Wednesday, Aug. 12, by $4.0625, or 50.75 percent, from its Aug. 11 close of $8 to $12.0625 on the news. Despite the resurgence in Quickturn stock, shares failed to exceed the $12.125 buyout offer. Quickturn shares slipped to $10.50 at Friday's close. Mentor's offer represents a 52 percent premium to Quickturn's closing price of $8 a share on Tuesday, the day before the bid was announced. Mentor, which owns about 3 percent of Quickturn's shares, will also try to wrest control of the board. So far, Mentor's bid is not a friendly one, and despite industry comments to the contrary, this takeover was not attempted simply as a way to solve the numerous pending lawsuits between the companies. "If that were true, that would mean that the lawsuits could be solved merely by cross-licensing the companies' technologies," explained Gregory Hinkley, executive VP, COO and CFO of Mentor. Because it felt so strongly about its intention to acquire, Mentor filed two lawsuits in an attempt to prevent directors of Quickturn from blocking its takeover proposal. One of the suits requests an order from the U.S. District Court in Wilmington, Delaware, to say that its offer complies with federal law so that Quickturn directors will not complain that security laws are being violated. In the other suit, Mentor is asking the court to restrain Quickturn from using a "poison pill" and other anti-takeover measures, which it expects them to do. If Quickturn were to implement a poison pill tactic, stockholders--with the exception of Mentor, which owns 3 percent--could buy Quickturn stock at low prices, thereby diluting other holdings and making the takeover attempt prohibitively expensive. However, if Mentor does not win these cases, Quickturn may employ other legal defenses to slow and likely destroy the hostile takeover attempt. In a nutshell, Mentor wants to make sure that they have an opportunity to present the offer to Quickturn shareholders. "We want to be a preeminent player in system verification with a large stake in emulation," Mr. Hinkley said. While the company does not think Quickturn has a good product on the market (although Mentor thinks the still-in-beta Mercury looks good), what Quickturn does have is the manufacturing and sales infrastructure that Mentor lacks. Mentor asserts it had been talking with Quickturn about a potential merger/acquisition, even before legal actions between the companies. "This is a serious courtship...and even if the legal issues were resolved, Mentor would still continue with its takeover," he said, describing the companies fitting together like "a hand in a glove." As of Friday afternoon, Mr. Hinkley was "very hopeful it will turn friendly." A takeover is considered hostile when the company attempting the takeover goes directly to the shareholders, whereas in a friendly offer, the acquiring company negotiates with the management first. Quickturn must now hold a meeting of its board. In line with Mr. Hinkley's comments, late Wednesday, Quickturn had issued a statement acknowledging receipt of the offer from Mentor and said that Quickturn's board of directors will study the offer and make its recommendation to shareholders "in due course." In the meantime, Quickturn urged its shareholders not to take action until the board of directors has made its recommendation. If the transaction is completed in 4Q98, Mentor expects to save $30 million in the year 2000 by eliminating overlap in duplicate selling, general and administrative costs, research and development, litigation expenses and from the realization of manufacturing efficiencies. In terms of product lines fitting together, Dr. Walden Rhines, Mentor's president and CEO explained that while Mentor has a high-end emulation system that it sells outside the U.S., Quickturn has products that address the rest of the market. Some have argued that Quickturn shareholders may not be getting enough value for the stock with this bid, however Mentor's Mr. Hinkley pointed out that the offer is for 40 times what next year's earnings would be. In addition, while Quickturn is not the company they might hope to be, Mentor believes it is giving a fair offer for who they are today. Over the past year, Quickturn's stock price has languished. While the company controls 60 percent of the emulation market, according to Jennifer Smith, research analyst at Robertson Stephens, and has a broad verification product offering with future sales potential, Quickturn remained pinned to the mat in terms of investor interest. Quickturn began the year at $13. The company climbed above $15 in September and October of 1997, only to steadily fall to $11 in January 1998. In February, Quickturn hit $15 again briefly, before the company's share price would erode to $7 over the next few months. From June until Mentor's overtures became public, Quickturn shares remained in the $7-$8 range. "I can't say whether Quickturn's stock being down had anything to do with this," says Dave Burow, Synopsys senior VP, high-level verification group. "If Quickturn's stock was not down, I cannot speculate whether Mentor would have done this anyway. Although, if you are going to do a cash deal it is better if the stock price is low." In late July, Ms. Smith instituted coverage of Quickturn based on its market position and although she did not say it directly, her comments alluded to the undervalued theme. She instituted coverage despite being conservative in her estimates for Quickturn in the second half of 1998 and into 1999. She labeled the company "long term attractive," saying that Quickturn stood poised to improve its market position once the semiconductor market resumed its growth cycle--something no industry prognosticator can point out. |