In an article on Monday February 14, Mike Rogoway of The Oregonian, reports on a serious challenge to the leadership of the existing executive management of Mentor Graphics. The company, in what may appear to be a misguided decision, timed the February announcement of the date of its annual meeting in May so that there were only ten days available for any outsider to nominate candidates for the company Board of Directors.
Given the "differences of opinion" between Mentor's management and Carl Icahn, its major outside investor, such move may be judged "cute but ill advised" by a neutral outside observer such as myself. When one is dealing with an experienced and financially powerful dissident, one should be accommodating in those areas that really do not substantially change the outcome. Whether Carl Icahn had ten days or a month to offer his own candidates for a Board position is irrelevant. Everyone knew this was coming, so why pour salt on the wound?
I can also not believe that Mentor's management was not aware that Casablanca Capital owns approximately 5% of Mentor's stock. Did anyone at Mentor even think that an alliance between Carl Icahn and Casablanca Capital could be possible? Are clouds really this low in Wilsonville?
Although Casablanca Capital and Carl Icahn have stated that they are not working together but have a common goal, one cannot dismiss the possibility that the two parties would informally work "for the common good". Does anyone at Mentor realize that even under the poison pill rules adopted last year by the Board to fend off Carl Icahn, Casablanca can purchase an additional 10% of the stock and thus build a coalition of outside investors that owns 30% of the company? What power would at that point have the present management faced with a revolt by almost one third of its stockholders?
The Oregonian reports that: "Mentor declined comment Monday, except to say that both Icahn's and Casablanca's nominees will go to the company's nomination and governance committee for review. The committee consists of independent directors on Mentor's board." One of course must say that the independent directors have so far supported the present management approach to business.
It must be also said, as The Oregonian points out, that " In practice, it's very difficult for activist investors to win a proxy fight." But this is not an average fight and these are not average activists. To begin with the two outside investors could seriously depress Mentor stock price should they begin to sell their shares, something other investors will need to take into consideration. Second it cannot be denied that Mentor's financial performance has been lackluster in the last few years. To be sure, EDA companies like Cadence and Magma have also seen difficult financial times, but both are recovering with very reassuring financial achievements in the last twelve months. This is not to say that either of these companies is out of the financial woods, but the signs are all positive.
In the mean time, Mentor has not been able to approximate, let alone equal, the performance of Synopsys, a company that also did not suffer a financial upheaval in the last few years. Yet Mentor public relation staff works very hard to position the company as the second largest EDA company by revenue. This invites comparison with the largest one, Synopsys, and the comparison is not favorable to Mentor.
Casablanca Capital proposed its Chairman, Donald Drapkin, Arthur Becker, Former chief executive of a technology servicing company NaviSite ,and Michael Barr, CEO of the online advertising startup 2KDirect as candidates for the Mentor Board. Carl Icahn on his part has nominated Jose maria Alapont CEO of automotive supplier Federal Mogul Corporation, Gary Meyers former CEO of Synplicity and newly elected member of the Board of Oasys Design System, and David Schechter who sits on various company boards including XO Communications, a wireless communication company.
Drapkin and Icahn have increased the pressure on Mentor's management by appearing together on a CNBC show and making negative comments on the way Mentor has been managed. To be sure Mentor's management can point to what ,for an EDA company, are reasonable financial performance. Even in times of GAAP losses, Mentor did better than some of its direct competitors.
It is difficult to predict a peaceful resolution of this proxy fight in the short term without considering some changes to Mentor's executive team. The core team has been in place for a long time, even if the position of VP and General Managers of the various operating divisions have changed within the last ten years, in some cases more than once. The exceptions are Joe Sawicki, whose Calibre product family is indeed Mentor's "golden egg", and Henry Potts who has successfully grown its Printed Circuit Board division into a system division that serves a market much larger than just PCB design and manufacturing. At this moment these two divisions represent a strong financial reality and a promising future for Mentor, but they are constrained by the average or below average performance of the rest of the company.
That changes are needed at Mentor is obvious: how they will happen is much more difficult to say but what is clear is that the ball is firmly in its present management team's court.