Siemens Goes ECAD With Mentor Graphics Acquisition

By acquiring one of ECAD’s giants, Mentor Graphics, Siemens continues to round out its design capabilities far beyond its MCAD roots as part of its Vision 2020 quest. Siemens says the acquisition is an extension of “shaping the Digital Industrial Enterprise by expanding its portfolio for industrial software.”

Under terms of the agreement, Siemens will acquire Mentor for $37.25 per share in cash, which represents a value of $4.5 billion. The offer price represents a 21% premium to Mentor’s closing price on November 11, 2016, the last trading day prior to the announcement.

Major Mentor shareholder Elliott Management has committed to support the transaction. In many ways, I don’t think Mentor had much of a chance of fending off the acquisition, as its profits were minuscule (and had been for some time), and got strong-armed by Elliott who owns a good chunk (~8%) of Mentor. By the way, Elliott blessed the offer.

Elliott Management, run by billionaire Paul Singer, said when it raised its stake it saw numerous opportunities to boost Mentor’s “deeply undervalued” shares and had started talks with the company’s management and board. According to the company, the acquisition is a “great outcome” for Mentor shareholders as the company will benefit from Siemens’s increased scale and greater resources.

The acquisition extends Siemens’ Digital Enterprise Software portfolio with Mentor’s electronics IC and systems design, simulation, and manufacturing software – capabilities essential for smart connected products, such as autonomous vehicles.

“Siemens is acquiring Mentor as part of its Vision 2020 concept to be the Benchmark for the New Industrial Age. It’s a perfect portfolio fit to further expand our digital leadership and set the pace in the industry,” said Joe Kaeser, President and CEO of Siemens AG.

“With Mentor, we’re acquiring an established technology leader with a talented employee base that will allow us to supplement our world-class industrial software portfolio. It will complement our strong offering in mechanics and software with design, test and simulation of electrical and electronic systems,” said Klaus Helmrich, member of the Managing Board of Siemens.

Mentor is headquartered in Wilsonville, Oregon, and has employees in 32 countries worldwide. In its fiscal year ended January 31, 2016, Mentor had over 5,700 employees and generated revenue of approximately $1.2 billion with an adjusted operating margin of 20.2%. Siemens “expects” these margins to continue in the future and contribute to the PLM software business of Siemens Digital Factory (DF) Division, which Mentor will join.

“Combining Mentor’s technology leadership and deep customer relationships with Siemens’ global scale and resources will better enable us to serve the growing needs of our customers, and unlock additional significant opportunities for our employees,” said Walden C. Rhines, chairman and CEO of Mentor. “Siemens is an ideal partner with financial depth and stability, and their resources and additional investment will allow us to innovate even faster and accelerate our vision of creating top-to-bottom automated design solutions for electronic systems. We are excited to join the Siemens family, as it is clear they share the same values and focus on customer success, and are pleased that this transaction provides immediate and certain value to our stockholders.”

The deal follows Siemens’ $970 million January purchase of simulation developer CD-adapco as CEO Kaeser seeks to grow the digital business as part of a retreat from consumer-oriented products to focus on industrial applications. Mentor is the biggest acquisition announced by Siemens since it bought Dresser-Rand Group Inc. for $7.6 billion. For its part, and it’s no secret, Mentor was under pressure to increase shareholder value from activist investor Elliott Management, which doubled its stake in September.

“The footprint of Mentor Graphics will allow us to reach a lot more customers,” Siemens software executive Chuck Grindstaff said on a conference call. “This offers a unique opportunity to design products in a more holistic way.”

Was The Acquisition A Fire Sale?

Nine days after the acquisition announcement, Mentor Graphics reported its Q3 2016 fiscal results. Like virtually all reports on financial results, Mentor Graphics painted a relatively rosy picture.

“Mentor’s third quarter results solidly exceeded revenue and earnings-per-share guidance,” said Mentor’s Rhines. “Book to bill was significantly above one with strength in both semiconductor and system accounts. Growth of the annual run-rate in our top 10 customers was a strong 60 percent in the third fiscal quarter. After quarter end, on November 14, we announced an agreement whereby Siemens will acquire Mentor Graphics. Joining forces with Siemens will enable Mentor to achieve the next level of success for our customers and employees.”

Mentor reported a loss of $10 million in the six months ended July 31, compared with profit of $21 million in the same period last year, according to an Aug. 18 regulatory filing. The company forecast revenue of $1.22 billion for the 12 months through January.

Interestingly, but not surprisingly, as a result of the acquisition announcement, Mentor will not provide an outlook for future financial results and is withdrawing all previously issued financial guidance. The company announced a quarterly dividend for Q3 2016 of $0.055 (5.5¢) per share, so if you own a million shares, you just made $55,000.

Mentor Graphics has been fending off interest from activist investors for years. Carl Icahn fought and won a proxy fight to get three board seats in 2011, but he later exited the trade. Icahn, who was Mentor’s largest shareholder at the time of his bid, sold a chunk of his holding back to the company at $18.12 a share in February of this year, and he sold his remaining stock in May. Elliott Management in September reported a stake in the company, saying the shares were deeply undervalued, according to Reuters.

In October, Reuters also reported that Mentor Graphics had hired Bank of America to explore strategic alternatives, including, I assume, a possible quick sale.

While researching this blog, I was wondering how market capitalization (market cap) might have entered into the Mentor acquisition equation. Simply, market cap is the market value of the shares outstanding of a publicly traded company, being equal to the share price at that point of time times the number of shares outstanding. Market capitalization is used by the investment community in ranking the size of companies, as opposed to sales or total asset figures. The market capitalization for the three biggest names in ECAD as of November 2016:

• $9.2 billion – Synopsys
• $7.5 billion – Cadence
• $4 billion – Mentor Graphics

I’m no financial whiz, but the market cap of about $20 billion for the top three ECAD companies boggles my mind when compared with Apple’s market cap, which is approximately $590 billion.

What Siemens Gains – Synergy

Since taking control in 2013 Kaesar has made it a priority to sell off core units to boost profitability. Under Kaeser’s leadership, Siemens has pushed deeper into software applications that are crucial to run its industrial equipment. At the same time, Siemens is simplifying its burgeoning portfolio.

Mentor Graphics DMS is the management solution for the electronic design process. It provides all technical and commercial selection criteria to design tool users, including filtered libraries for multiple flows, multiple technologies and multiple design groups. It manages the work in process design process and the WIP Bill Of Material. Process integration between the engineering environment and the PLM world as well as data sharing and integration are accomplished with DMS in a way that makes the integration independent from the used CAD tool flow and its versions and the PLM systems version.

Additionally it is a single point integration for the entire design community with a single or multiple CAD tool flows. As client server application it is using a central database (master repository) for data management and clients on the engineering desktop that are tightly integrated with the design tools to support best-in-practice ECAD design data management.

In another recent acquisition for synergy, this past January Siemens acquired CD-adapco for $970 million. At the time, Klaus Helmrich, a Siemens Managing Board member said, “As part of its Vision 2020, Siemens is acquiring CD-adapco and sharpening its focus on growth in digital business and expanding its portfolio in the area of industry software. Simulation software is key to enabling customers to bring better products to the market faster and at less cost. With CD-adapco, we’re acquiring an established technology leader that will allow us to supplement our world-class industry software portfolio and deliver on our strategy to further expand our digital enterprise portfolio.”

Speaking of Siemens’ Vision 2020 . . .

Vision 2020

In 2014, Siemens AG, the parent company all things Siemens announced a broad-based restructuring of its portfolio, called Vision 2020, creating nine divisions to replace the 16 under which the company previously operated.

The Vision 2020 plan calls for Siemens to emphasize the “electrification, automation, and digitalization” fields, where the company sees maximum long-term potential. As part of the emphasis and to prove it was serious, Siemens acquired the Rolls-Royce Energy auto-derivative gas turbine and compressor business.

In addition, Siemens said that some of its business would be separately managed in the future, a move that will give the business “greater flexibility in various engineering markets,” which is characterized by continual fundamental changes and paradigm shifts.

In the future, Siemens AG will position itself along the electrification, automation and digitalization. Along these value chains Siemens has identified several growth fields in which it sees its greatest long-term potential. The company is orienting its resource allocation toward these growth fields, such as power and gas, energy management, Digital Factory, and process industries and drives, among others.

Siemens intends to fully exploit the potential of increasing digitalization and not just in manufacturing and the Digital Factory. Data-driven services, software, and IT solutions are also important as they have a substantial influence on all of Siemens’ future growth fields.

In The End

Like all acquisitions, it remains to be seen how this one will fare for customers, employees, and shareholders. If nothing else, it provides a closer step to one-stop shopping for companies designing “smart” products that contain mechanical, electrical, and electronic components, and these days that includes just about every product imaginable. It will be interesting to see how well Mentor’s ECAD software technologies dovetail and fit into the Siemens stable of NX, Teamcenter, Solid Edge, etc. No doubt it will be a tall task to make them work together, but Siemens is one of a handful of companies that has the ability to pull it off.

Tags: CD-adapco, ECAD, MCAD, Mentor Graphics, Siemens AG, synergy

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