Cadence could find it tough to raise debt for bid
SAN FRANCISCO (Reuters) - Cadence Design Systems' (CDNS.O) pursuit of rival chip design software maker Mentor Graphics Corp (MENT.O) could fall through on concerns over its ability to shoulder additional debt after it lowered its financial outlook last month.
In June, San Jose, California-based Cadence disclosed its offer to buy Mentor for roughly $1.5 billion, or $16 a share. Cadence said it would have to raise in excess of $1.1 billion in debt to pay for the unsolicited, all-cash bid.
Cadence executives have said the acquisition is vital to speed up growth, with stiff competition squeezing margins.
Since then, Cadence's own financial outlook has deteriorated after it posted dismal second-quarter results. Cadence could now find it tough to raise debt in an already difficult credit environment, because bankers determine how much to lend and on what terms using measures derived from financial performance.
Mentor has rejected the offer as being too low, and analysts expect Cadence to raise its offer to $18-$20 a share, for which the company would have to take on even more debt.
In July, Cadence posted a 92 percent plunge in second-quarter profit, forecast a big third-quarter loss and halved its 2008 operating cash flow outlook to $175 million. It also lowered its 2008 revenue outlook by 25 percent, sending shares down to their lowest in more than 12 years.
"There's the question now on whether a bid that high could be financed," Citigroup analyst Terence Whalen said, adding that depleted cash flow means raising more debt and potentially complicating the process of credit approval.
There is "reasonable doubt" that Cadence could get financing even at $16 a share, a person familiar with the matter told Reuters.
GETTING THE RIGHT MULTIPLES
An acquiring company often seeks outside financing to supplement its own cash to pay for an acquisition. Financing terms are negotiated on a number of factors, such as the acquirer's corporate credit rating, the lenders' ability to repackage and sell that debt, and measures such as the combined company's total debt-to-EBITDA ratio.
Today's tough credit market has already made it difficult for companies, especially those with non-investment grade credit ratings, to secure debt since banks are offering fewer loans.
"The market has changed from the time Cadence made their offer," said one technology banker not involved in the deal, on condition of anonymity. "Debt convenants have turned stricter and terms have become more expensive in the short term."
In its latest quarterly filing, Cadence said it had substantial outstanding debt of $730 million in convertible notes, but this debt is not rated by credit rating agencies.
The ratio of debt to EBITDA -- which stands for earnings before interest, taxes, depreciation and amortization and is a key measure of profitability -- is equally important in determining the amount and terms of debt a company can secure, said three technology bankers not involved in the deal, who spoke on condition of anonymity because their banks could look at lending the money.
A debt-to-EBITDA multiple of 2 to 3 -- usually calculated by adding the total debt on each company's books and dividing it by their combined EBITDA for the last 12 months -- is generally considered safe, these bankers said. Continued...
