There's more unrest than usual in the electronic design automation kingdom, and for once it has bubbled to the surface in a way that could produce some meaningful consolidation among the triumvirate of top players ruling the industry. It's a long shot, though.

On Tuesday, Cadence Design Systems Inc. [CDNS] said it has offered to acquire Mentor Graphics Corp. [MENT] for $1.6 billion, or $16 per share. Although that represents a 30% premium to Mentor's closing stock price Monday of $12.33, the bid is well below the target's high of roughly $19 ia share in January 2007. Mentor shares spiked 26%, to $15.59, in early trading Tuesday.

Mentor's stock chart has ebbed and flowed with the tides of the semiconductor industry, which is in a cyclical downturn right now thanks to a general oversupply of chips. And that's one reason that the company, which makes software used to design and test semiconductor designs, is not sitting down at the bargaining table with Cadence. Because of the sine curve of the semiconductor industry cycle, what is down is bound to go up. Most observers agree that because the chip industry is maturing, the highs and lows are becomimg more muted. But Mentor is sure to view $16 per share as an opportunistic move by Cadence.

In a letter to Mentor chairman and CEO Walden Rhines (pictured), Cadence president and CEO Michael Fister noted that he first talked to Mentor about a potential deal on April 12. Cadence more formally presented the terms of the offer on May 2. After that, however, Mentor was done talking.

"Following the May 2nd meeting, we repeatedly attempted to bring the Cadence and Mentor Graphics leadership teams together to discuss our proposal," Fister said. "On May 23, 2008, however, you informed us that, even without any substantive discussion with us or negotiation of our proposal, Mentor Graphics concluded that it did not wish to pursue discussions with us given Mentor Graphics' desire to stay independent."

If Cadence could bag Mentor, it would mark the company's biggest deal ever, and would be a game changer for the industry. Most deals in the EDA industry consist of the big guys buying tiny startups, but mid-market deals happen on occasion. In 2005, for instance, Cadence paid $282 million for Verisity Ltd., one of a handful of EDA companies that had managed to grow beyond the startup phase. There were, and still are, some others that avoided getting gobbled up while still tiny and went public (most EDA startups unabashedly build software tools with an eye to getting acquired by the big three).

Others like Verisity include Magma Design Automation Inc., Nassda Corp. and PDF Solutions Inc. Synopsys Inc. [SNPS] (the third big EDA company ruling the industry alongside Mentor and Cadence) agreed to acquire Nassda in December for $200 million. Simplex Solutions Inc. was part of this group, too, but Cadence acquired it for $300 million in 2002.

Still, the odds are low that Cadence will close a deal for Mentor, at least not at this price. These companies are fierce, independent-minded competitors. In the end, Rhines might just take a page from that other recently failed hostile tech takeover attempt and pull a Yang. And the triumvirate, for better or worse, will remain whole. -- Olaf de Senerpont Domis

See June 17 press release on Cadence's Mentor offer via Yahoo! Finance
See June 17 story on Cadence's hostile offer from TheDeal.com
See January 2005 story on Verisity acquisition from TheDeal.com
See May 2004 story on the EDA industry from TheDeal.com