Fall got off to a busy start for Mentor Graphics, the Wilsonville-based electronic design automation company that makes software products for engineers.
In late September, the activist investment firm Elliott Management disclosed more than 8% ownership in Mentor; two weeks later, Mentor announced the acquisition of Ireland-based Galaxy Semiconductor. The company, which employs 5,000 worldwide (1,000 in Oregon) and grossed $1.24 billion in 2015, has also been buffeted in the past couple of years by consolidation in the semiconductor industry, its core customer base. In these edited excerpts, CEO Wally Rhines, 70, discusses activist investors, new markets and why Mentor won’t be moving to the Pearl District anyime soon.
In 2011 Mentor was sucked into a public proxy battle with Carl Icahn. Are we witnessing another activist-investor showdown?
We are not strangers to filers of 13D* who openly express their desire to communicate their ideas to management. Many of them have ideas; we listen. We’ve been involved before in this type of discussion. Any actions taken as a result by the Mentor Graphics board will be in the best interest of our shareholders, our customers and our employees.
*Schedule 13D is an SEC filing that must be submitted to the U.S. Securities and Exchange Commission by anyone who acquires ownership of more than 5% of publicly traded securities in a public company.
Can you be more specific about the impact of the Elliott buy?
We don’t give details of discussions of details with shareholders of any kind.
As we went to press, Mentor was reportedly considering a potential sale. Rhines declined further comment.
The last Icahn investor stepped down from Mentor’s board in February. How do you tell the story about Icahn today?
Carl Icahn made a substantial investment in about 15% of our stock. He profited handsomely from that investment. Through board involvement, he came to understand the strategy and reasons for why we do what we do. As far as I know, he was a happy shareholder through most of his tenure with Mentor Graphics.
It’s been a year of ups — and downs. In the fourth quarter of 2015, Mentor’s stock price plummeted.
Unique market events presented in the fourth quarter of last year. The growth of our emulation business temporarily stalled as two competitors came into the market. The other thing was major mergers in the semiconductor industry. When two big companies join together, the growth of the amount of software they have in annual renewals does a temporary reset. Normally our customers increase their usage of our software about 25% every three years. The companies that merged didn’t show an increase.
How does a legacy tech company stay relevant in today’s rapidly evolving software ecosystem?
The electronics industry is used to reinventing itself. We have to because of Moore’s law. Moore’s law says we are going to double the complexity of what we provide to people, which means we have to create whole new products at a very rapid rate. Intel has to do it. We have to do it.
How is Mentor reinventing itself?
The design part of electronic design automation grows at about the same rate as semiconductor industry, which is in the single digits. The same technology is applicable to systems design: trains, planes, cars, big systems. That market is growing in double digits. Mentor has a quite bright future applying the same basic capabilities that were required for integrated circuits to systems design. Fifty percent of our revenue already comes from system companies.
Jaguar Land Rover opened an automotive electronics incubator in Portland
Jaguar is a significant customer of ours. I personally drive a Jaguar F-Type R. In the last five years, we’ve grown at a compound growth rate of 25% per year in automotive electronics.
Is a Mentor incubator in the works?
We have all sorts of skunkworks, where somebody with a good idea says: I really want to work on this. That person gets a few other people, and we let them do it. A lot of our successful products have come out from those roots: a few individuals with great ideas.
Silicon Forest companies are migrating from the suburbs into the city. Will Mentor follow suit?
Probably not. It’s a very interesting phenomenon that downtowns, particularly Portland, San Francisco, are attracting young people today. There are many places around the world where we do have operations in the city. But we have a big investment here; we have a stable set of very good employees. People have arranged their commutes to be convenient, and it would be disruptive to be forced to move.
How is Mentor responding to the tech gender gap?
The majority of employees were engineers at the time Mentor was founded, and the graduation rate of women in engineering was very low. So when the company was founded it was very specifically targeting how do you make the work environment suitable for women who want to have families. That’s why we have a child development center; that’s why we have flexibility in the way we set work hours.
You have been on the job 23 years. What is your greatest accomplishment?
When I came here Mentor was the leader in three main segments which represented a small percentage of the market. Today we are the leader or primary contender in 90% of our revenue. So we made a dramatic shift from being a follower in most of our business segments, to being the leader or the primary challenger for the lead. We’ve done all this while positioning ourselves to grow in the future where the market is growing, which is systems design.
Your biggest failure?
Our attempt to acquire Quickturn in the 1990s. Because we failed, we created a competitor, and we had to develop product on our own to finally get the leading technology. It took us an extra 10 years at least, that we wouldn’t have had to take.
Mentor historically has shied away from acquisitions.
It’s part of the original culture. We’ve built up people who have the capability to build new products. And there have been periods when our stock price had a lower multiple, so we couldn’t go out and bid higher prices for things; we tended to build products for ourselves. We have also tended to focus where other people weren’t. We created new markets that didn’t exist before we got into them. You have to grow organically in those cases.
It’s important in Oregon to have technical leaders that are worldwide businesses that understand and bring together cultures from all over the world and keep us competitive on a worldwide basis. We have roughly half-our employees outside the U.S., and more than half of our revenue is outside the U.S. Everything we do is at the leading edge of technology; we need the best and the brightest. To the extent we can’t find them locally, we go where we need to go. We have a large facility in Cairo, in Lahore Pakistan — places that have good educational systems but not many job opportunities.