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Mentor Graphics Corporation
(Name of Registrant as Specified In Its Charter)
Icahn Partners LP
Icahn Partners Master Fund LP
Icahn Partners Master Fund II LP
Icahn Partners Master Fund III LP
High River Limited Partnership
Hopper Investments LLC
Barberry Corp.
Icahn Onshore LP
Icahn Offshore LP
Icahn Capital L.P.
IPH GP LLC
Icahn Enterprises Holdings L.P.
Icahn Enterprises G.P. Inc.
Beckton Corp.
Carl C. Icahn
Brett Icahn
David Schechter
Gary Meyers
Jose Maria Alapont
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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FOR IMMEDIATE RELEASE
ICAHN ISSUES OPEN LETTER TO SHAREHOLDERS OF MENTOR GRAPHICS
New York, New York, April 21, 2011
Contact: Susan Gordon (212) 702-4309
Carl C. Icahn today issued the following open letter to shareholders of Mentor
Graphics Corporation:
CARL C. ICAHN
767 Fifth Avenue, 47th Floor
New York, New York 10153
April 21, 2011
Dear Fellow Shareholders:
It is time for a change on the Board of Directors of Mentor Graphics. For the
first time, shareholders of Mentor Graphics are being presented with an
opportunity to elect directors not nominated by the entrenched Board. Eight
years have passed without a single director joining or leaving. All three of the
directors we seek to replace have been on the Board since 1994, just after
Walden Rhines became CEO. One of the directors we seek to replace is actually
the lead independent director, despite spending over 17 years on the Board with
the CEO and the President. Mentor's stock is now at approximately the same level
as it was in 1994 while CEO Walden Rhines received $65 million in
compensation.(i) This Board has failed to hold management accountable to
shareholders in our opinion. Shareholders can send a strong signal to this
entrenched Board by electing our three nominees.
Our plan is not limited to a sale of the Company. We have a clear plan to
improve earnings per share through improved oversight in two key areas where
over the past 17 years this Board has allowed for a bloated expense structure
and massive share dilution:
(1) SG&A GROWTH IN EXCESS OF TOTAL REVENUE GROWTH; AND (2) DILUTION.
Since 1994, Mentor's annualized revenue growth was 5.3% while its annualized
SG&A growth was 5.7%. This has led SG&A as a percentage of Total Revenues to
increase to 46%. This is quite unfortunate for shareholders, as with 5.3%
annualized revenue growth it seems absurd to us that Mentor could not better
leverage its SG&A expenses.
FY 1994 FY 2011
-------- --------
Total Revenues $390MM $915MM
Marketing and Selling $129MM $321MM
General and Administration $40MM $100MM
Total SG&A Expenses $169MM $421MM
ANNUALIZED REVENUE GROWTH 5.3%
ANNUALIZED SG&A GROWTH 5.7%
SG&A % OF TOTAL REVENUES 43% 46%
Even today, Mentor's SG&A as a percentage of Revenues is significantly higher
than its closest peers. We believe that Cadence's ratio of SG&A as a percentage
of Revenues would be lower if it was not still undergoing the effects of a
transition from a term based model to a ratable model that temporarily lowers
revenues. Even Magma Design Automation, a competitor of Mentor Graphics with
just $135M of Revenues, has roughly the same ratio of SG&A as a percentage of
Revenues.
LTM(ii) MENTOR SYNOPSYS CADENCE
------- ------ -------- -------
Total Revenues $915MM $1,415MM $936MM
SG&A $421MM $458MM $392MM
SG&A AS A % OF REVENUES 46.0% 32.4% 41.9%
This simple analysis is a clear warning sign. Mentor has grown SG&A at a rate in
excess of its 5.3% revenue growth and its SG&A relative to its revenues are
significantly higher than its peers. Often it is difficult for public companies
across our country to control growth in SG&A for a variety of reasons. The fact
that the CEO has been with the Company for 18 years may make it even more
difficult. While we believe a board should not micro-manage, in certain
instances where there are clear warning signs, a board needs to take action. At
Icahn controlled companies or those where we have a strong minority position on
the board, if presented with similar facts, we would move to form a committee of
the board to assess the situation in further detail, possibly engaging a leading
consulting firm to advise the board and also work cooperatively with management
in order to determine how to improve efficiency in the Company's SG&A spend. We
have set up an organization to develop methodologies and controls to leverage
best practices and make them available to portfolio companies and use the
collective scale of these companies to negotiate improvements in rates on a
variety of products and services from third parties. This cost control has been
an important factor in the success of the companies where we have been involved
over the years. We believe the collective impact of this effort will result in a
reduction in SG&A expenses without affecting the revenue growth of the Company.
One of our nominees, David Schechter, as an employee of Carl Icahn since 2004,
has served on the board of directors of several of the companies controlled by
Carl Icahn and is well versed and has been involved in employing methods that we
have used successfully to "cost control" without affecting revenue growth.
Mentor's Board has persistently diluted its shareholders while its closest peers
have not. The table below highlights the magnitude of this dilution over the
past eight years. During this timeframe not a single director was added or left
the Board of Mentor Graphics.
BASIC SHARES OUTSTANDING MENTOR SYNOPSYS CADENCE
------------------------ ------ -------- -------
Shares - 1/1/04 68.3MM 156.6MM 268.4MM
Shares - 3/31/11 112.3MM 150.9MM 268.6MM
% INCREASE 64.4% -3.6% 0.1%
This SG&A growth in excess of revenue growth and dilution are indicative of the
Company's performance since 1994. Over that timeframe the Company generated
negative $336MM of cumulative cash flow from operations less capital
expenditures and cash acquisitions.
Selling the Company is not our only plan. Our nominees have two plans that are
not mutually exclusive. Plan A is to explore a sale of the Company to a
strategic buyer. Plan B is to hold management accountable to lower the ratio of
SG&A as a percentage of Total Revenues (to be more in line with its peers) and
to use its cash flow to buy back its stock. Our Plan B could have a meaningful
benefit to earnings per share growth.
If the Company had identified just $20MM of SG&A reductions that would not
impact the top line and implemented them prior to its FY 2012, then its EPS
guidance would have been 15% higher(iii) than the $1.00 per share non-GAAP
guidance it provided. Keep in mind that even with this reduction, Mentor's SG&A
as a percentage of Total Revenues would still be higher than both its leading
peers.
If the Company uses its cash flow going forward to buy back stock, it will
reduce the share count and thereby further improve EPS. Assuming net income is
equal to cash flow, if Mentor used all its net income(iv) in the next fiscal
year to repurchase stock, at a price of $14.01 the Company could repurchase 8MM
shares, which represents 7% of its outstanding shares.
Our nominees are highly qualified to serve on Mentor's Board and to advocate for
Plan B.
JOSE MARIA ALAPONT - WHY HIS BACKGROUND IS RELEVANT TO MENTOR AND OUR PLAN B?
Mentor dedicated three pages of its Investor Presentation to its Transportation
Solutions segment that is growing and represents 15% of its product bookings in
recent quarters. Jose Maria is CEO of Federal-Mogul Corporation, which generates
over $6 billion in revenues and shares many of the same customers that Mentor
targets in its Transportation Solutions segment. Jose Maria has strong
relationships in this industry that are unmatched by the directors we seek to
replace and can clearly offer advice to management. Jose Maria has been a
visionary in terms of his efforts to improve the cost structure at
Federal-Mogul. As CEO he manages over 42,700 employees, a large multinational
customer base, numerous plants all over the world, and advanced technologies
throughout its products set. Jose Maria has aggressively managed his cost
structure while continuing to invest heavily in R&D to successfully lead his
company through an extraordinarily difficult period for the automotive industry.
Jose Maria has a clear track record of success as Federal-Mogul's stock price
has risen 10x from its low in 2009.(v)
GARY MEYERS - WHY HIS BACKGROUND IS RELEVANT TO MENTOR AND OUR PLAN B?
Gary is uniquely qualified to evaluate Mentor's product portfolio and assess the
Company's strategy. This knowledge will be instrumental in assessing how to
better manage SG&A. He recently left Synopsys in April 2010 where he served as a
senior executive after serving as CEO of Synplicity, a publicly traded peer to
Mentor Graphics, which was sold to Synopsys in 2008. Previously, Gary was a chip
designer and served in senior sales and marketing roles in the semiconductor
industry. Gary has a clear track record of success as Synplicity was sold for
$223 million to Synopsys, a 50% premium relative to the last closing price prior
to the announcement of the deal.(vi) Gary's industry expertise may assist the
Board in assessing whether there are any inefficient "pet projects" that should
be eliminated or scaled back.
DAVID SCHECHTER - WHY HIS BACKGROUND IS RELEVANT TO MENTOR AND OUR PLAN B?
David has a background as an investor in publicly traded companies that the
existing Board appears to lack and currently serves as a Portfolio Manager of
the Sargon Portfolio for Icahn Capital (Mentor's largest shareholder with
14.3%). This activist investment portfolio holds Mentor Graphics and therefore
David is highly incentivized to both limit the issuance of dilutive securities
and offer views on shareholder friendly activities that unlock value. Within
this portfolio, David serves as a board member of The Hain Celestial Group where
he has worked cooperatively with the board and management and has led a large
investment in another software company, Lawson Software, that has announced a
strategic review process. David has a clear track record of success as the
portfolio he co-manages generated an 80% return on its initial capital of $300
million since inception on 4/1/10 through 3/31/11.(vii) In addition to this
strong investment record, David has extensive experience implementing cost
controls at companies controlled by Carl Icahn. At several of these companies,
David has served as director and has engaged leading consulting firms which
collaborated with Icahn Sourcing, Carl Icahn's organization for managing cost
efficiency opportunities, identifying and eliminating unnecessary expenses to
improve efficiencies across major cost centers.
All three of our nominees are highly qualified with transparent career success
from a scale, performance, and relevancy perspective. It is not clear to us if
any of the three directors we seek to replace could say the same about their
performance in their last job.(viii) Don't we as shareholders deserve new
directors with strong backgrounds who can give a fresh perspective considering
the actions the Board has taken and the fact that these three directors we seek
to replace have served for an average of 22 years? Two of our three nominees are
or have recently been CEOs of publicly traded companies with industry experience
directly relevant to Mentor Graphics. We strongly encourage all shareholders to
look at the collective background and performance of our nominees and compare
them to the three directors we seek to replace.
Look at the record on corporate governance in terms of a sale of the Company and
the treatment of shareholders. The CEO of Cadence wrote a letter in June 2008 to
Walden Rhines saying "over the last two months, we have sought to engage you and
your Board of Directors in discussions regarding our proposal to combine Cadence
Design Systems, Inc. and Mentor Graphics Corporation. We are disappointed that,
despite our best efforts, you have thus far been unwilling to meaningfully
participate in such discussion" and "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". Shortly after becoming aware of our
investment in Mentor, the Board implemented a "poison pill" to limit our
ownership to 15%. The day after learning of another shareholder's investment in
the Company (Casablanca Capital), Mentor announced an annual meeting date
several months in advance of the prior year's meeting, thereby leaving
shareholders just ten days to nominate directors (a strategy we believe was used
to impede the nomination of directors by shareholders). The Board made this
decision on January 17th but didn't bother disclosing it to shareholders until
February 4th! After rejecting our offer to buy the Company for $17.00 per share
and to serve as a stalking horse (with no break up fees) so that the Company
could seek superior offers, this Board publicly named its "logical strategic
buyers" and detailed publicly in a presentation filed with the SEC why there may
be regulatory issues. These series of events lead us to question this Board's
intent.
Look at the facts that we have presented on the Board's oversight of SG&A and on
dilution. The record is clear as we highlighted earlier. Just one day after
rejecting our offer of $17.00 as undervalued, this Board, despite no urgency and
clear alternatives that required no dilution, announced and priced a dilutive
convertible debt security. It took this Board seven days to publicly acknowledge
that in the event of an acquisition of the Company for cash, the conversion
price drops to a price far below the headline conversion price of $20.54.
Now is your chance for a change. Don't let yourself be susceptible to fear
mongering. Our nominees, if elected would collectively represent a minority of
the Board with just three of eight seats. Therefore, change can occur only with
the support of several existing directors. We are confident in our plans
outlined to enhance value and the ability of our nominees to improve governance.
Mentor Graphics has tremendous assets developed through its world class research
and development organization, and we are confident in our investment and the
future for Mentor Graphics shareholders if our nominees are elected to the
Board.
Mentor Graphics needs new ideas, new blood, and a new way of thinking. Over two
decades of entrenchment, this Board has lost the drive to perform. They have not
been held accountable. As a result, they allowed the expenses of the Company to
grow year after year without the proper systems of control in place necessary to
maintain efficiency. They have allowed for outsized share dilution year after
year while the shareholders suffered. We believe our nominees can bring change.
We are confident that if you vote for our nominees, shareholders will no longer
feel compelled to go on television and call this Company a "country club." We
strongly encourage you to vote the GOLD proxy card.
Sincerely yours,
CARL C. ICAHN
If you have any questions or require any assistance in executing your proxy,
please call:
D.F. King & Co., Inc.
Shareholders call tollfree: (800) 7143313
Banks and Brokerage Firms call: (212) 2695550
IMPORTANT DISCLOSURES
These materials are based solely on information contained in the public domain.
We have relied upon and assumed, have not attempted to independently investigate
or verify, and do not assume any responsibility for, the accuracy, completeness
or reasonableness of such information. No representation or warranty, express or
implied, is made as to the accuracy or completeness of any information included
or otherwise used herein, and nothing contained herein is, or shall be relied
upon as, a representation or warranty, whether as to the past, the present or
the future. These materials are necessarily based upon information available to
us, and financial, stock market and other existing conditions and circumstances
that are known to us, as of the date of these materials. We do not have any
obligation to update or otherwise revise these materials.
The information contained in these materials does not purport to be an appraisal
of any of the assets or liabilities of Mentor Graphics or any of its business
units or subsidiaries, or any other companies mentioned herein, and does not
express any opinion as to the price at which the securities of any such entities
may trade at any time. The information and opinions provided in these materials
take no account of any investor's individual circumstances and should not be
taken as specific advice on the merits of any investment decision. Moreover,
nothing contained herein should be construed as providing any legal, tax or
accounting advice, and you are encouraged to consult with your legal, tax,
accounting and investment advisors. You should consider these materials as only
one of many factors to be considered in making any investment or other
decisions. We do not accept any liability whatsoever for any direct or
consequential loss howsoever arising, directly or indirectly, from any use of
these materials.
ON APRIL 1, 2011, CARL C. ICAHN AND AFFILIATES ("ICAHN") FILED A DEFINITIVE
PROXY STATEMENT WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") IN
CONNECTION WITH THE UPCOMING 2011 ANNUAL MEETING OF SHAREHOLDERS OF MENTOR
GRAPHICS. SHAREHOLDERS ARE ADVISED TO READ ICAHN'S DEFINITIVE PROXY STATEMENT,
AND ANY OTHER RELEVANT DOCUMENTS FILED BY ICAHN WITH THE SEC, BEFORE MAKING ANY
VOTING OR INVESTMENT DECISION BECAUSE THEY CONTAIN IMPORTANT INFORMATION. THE
DEFINITIVE PROXY STATEMENT IS, AND ANY OTHER RELEVANT DOCUMENTS AND OTHER
MATERIAL FILED BY ICAHN WITH THE SEC CONCERNING MENTOR GRAPHICS WILL BE, WHEN
FILED, AVAILABLE FREE OF CHARGE AT HTTP://WWW.SEC.GOV AND
WWW.READMATERIAL.COM/MENTOR. IN ADDITION, COPIES OF THE PROXY MATERIALS MAY BE
REQUESTED FROM ICAHN'S PROXY SOLICITOR, D.F. KING & CO., INC., BY TELEPHONE AT
(800) 714-3313.
___________________________
(i) Walden Rhines received $20MM in base and bonus/non-equity incentive plan
compensation, along with 4.3MM options and shares worth $45MM applying SFAS
123R methodology post 1/1/06 and the midpoint of potential realizable value
at assumed annual rates of stock price appreciation for option term of 5%
to 10% prior to 1/1/06 and the closing share price on 12/31/93 for Mentor
was $13.75 versus $14.01 on 4/18/11.
(ii) Last twelve month results as identified in the respective Company 10K and
10Q.
(iii) $20MM expense reduction tax effected at a 17% non GAAP tax rate divided by
the 112.3MM shares outstanding on the record date of 3/11/11 equates to an
EPS improvement of $0.15 per share.
(iv) $112.3MM which equates to Company guidance of non-GAAP EPS of $1.00 per
share x 112.3MM shares outstanding on the record date of 3/11/11.
(v) Past performance is no indication of future results.
(vi) Past performance is no indication of future results.
(vii) Past performance is no indication of future results.
(viii) Other than "industry consultant" or "private investor" or "board
director."