Casablanca Capital Sends Letter to Mentor Graphics Shareholders
25 4월 2011 - 9:30PM
Business Wire
Casablanca Capital LLC (“Casablanca”) today sent a letter to the
shareholders of Mentor Graphics Corporation (NASDAQ: MENT).
The text of the letter is below.
April 25, 2011
Casablanca Capital LLC
450 Park Avenue
Suite 1403
New York, NY 10022
Dear Fellow Mentor Graphics Shareholders:
As a 5.4% shareholder, we are disturbed that Mentor Graphics’
Board of Directors and management have not delivered shareholder
value and are not acting in your best interests. We believe the
status quo at the company is unacceptable, and we intend to vote
our shares at the May 12th Mentor Graphics annual meeting in
support of the Icahn Group’s nominees, who we believe are well
qualified and will work in the best interests of all
shareholders.
While the Icahn Group has issued materials in support of its
nominees, the following are our own, independent observations
regarding Mentor Graphics’ long record of abysmal underperformance
and poor governance practices:
- Over the past 19 years under current
management, Mentor’s share price is down 18%, with ZERO return for
shareholders. How can we as shareholders support a Board that is
responsible for this underperformance?
- Mentor’s share price is down 18%
unaffected for Casablanca’s and the Icahn Group’s purchases1 versus
gains for Synopsys of 112%, 292% for Cadence and 185% for the
S&P 500
- History of excessive shareholder
dilution:
- Mentor’s share count has increased 72%
over the last 10 years, versus 10% and 23% for Cadence and
Synopsys, respectively
- Mentor’s issuance of $253mm of
convertible bonds in March 2011 was another act of dilution while
also increasing the costs for potential buyers and further
entrenching the company’s leadership
- Abysmal free cash flow
generation:
- Mentor has only delivered $113mm of
free cash flow over the last 10 years versus over $2 billion each
for Cadence and Synopsys
- Meanwhile, Mr. Rhines has paid
himself $65mm during his tenure2
- Bloated cost structure:
- For calendar year 2010, Mentor spent
over 34% of revenues on selling & marketing expenses while
Synopsys spent 24%3
- Mentor spent almost
$100mm on general & administrative expenses last year,
similar to Synopsys (more than twice Mentor’s size) and over 25%
more than Cadence
- These higher expenses are egregious
given the lower cost of living in the suburbs of Portland, Mentor’s
headquarters, versus both Cadence and Synopsys located in Silicon
Valley
- Lowest revenue per employee compared
with peers - 16% lower:
- $195k for Mentor versus Synopsys’ $233k
while Cadence’s revenue per employee was $233-$305k from 2003 to
20074
- Obstructionist Board antagonistic to
shareholder concerns:
- Accelerated their 2011 shareholder
meeting and rejected the Icahn Group’s $17 per share offer with
little explanation
- Publicly prejudged the feasibility of a
third party combination despite strong strategic and financial
rationale
- Implemented a Poison Pill and issued a
dilutive convertible bond despite non-dilutive alternatives
- Entirely unaligned with shareholder
interests as the Board and management collectively own less than 1%
of the shares
- Mentor’s directors, with a 15 year
average tenure, have no relevant expertise aside from serving on
Mentor’s Board:
- None of the directors the Icahn Group
has proposed to remove have been recently employed as other than an
“industry consultant”, “private investor” or board director
- By comparison, the Icahn Group’s
director nominees are highly regarded professionals with a history
of success in dealing with public companies:
- Jose Maria Alapont – CEO of a $6
billion public auto parts supplier, which operates in a highly
competitive cost conscious industry
- Gary Meyers – EDA industry expertise as
former CEO of a publicly listed company, Synplicity
- David Schecter – proven asset manager
and a direct representative of Mentor’s largest shareholder
- There is no reason to believe in
management’s ability to execute on its unimpressive strategic goals
without historical precedent
- Mentor has guided to 15% non-GAAP
operating margins near term and 20% longer term versus 23% achieved
by Synopsys and Cadence’s target of operating margins in the mid
20s
- No detail on how management’s plan will be achieved
- In summary, Mentor has been a persistent underperformer:
- Negative share price returns
- Poor operational performance
- Dismissal of shareholder concerns
Based on these facts, we strongly believe it is time for a fresh
perspective on the Board. While we are acting independently and are
in no way connected with the Icahn Group, we believe voting in
favor of the Icahn Group’s director nominees will ensure
that Mentor’s Board will be held accountable and work on behalf
of all shareholders.
Kind regards,
Donald G. Drapkin
Douglas Taylor
Francisco D’Agostino
Chairman
Chief Executive Officer
President
About Casablanca
Casablanca Capital LLC is a research driven investment manager.
Casablanca Capital, and, on behalf of its affiliated funds, managed
accounts, certain investment advisory clients and funds under
common control (“Casablanca” or “we”) and Donald Drapkin
(“Drapkin”, and together with Casablanca, the “Investors”)
collectively have beneficial ownership in Mentor Graphics
Corporation (“Mentor” or the “Company”) of more than 6 million
shares, or approximately 5.5%, of the Company’s outstanding common
stock.
1 Unaffected share price represents the average share price of
Casablanca’s and the Icahn Group’s purchases of $10.37
2 Per Icahn Group’s presentation filed with the SEC on April 12,
2011
3 Cadence spent 32% of revenues on selling & marketing
expenses in 2010. Cadence underwent an accounting change in 2008
that altered its revenue recognition policy and depressed revenues
throughout the life of their client contracts. Any comparison to
Cadence from 2008-2010 should take this effect on revenues into
account. We expect the revenue base to be normalized some time in
2012. From 2005-2007 Cadence averaged 25% selling & marketing
margins.
4 In 2010 Cadence had revenue per employee of $203k, although
Cadence’s revenue is still affected from the accounting change
Mentor Graphics Corp. (NASDAQ:MENT)
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