Planned acquisition of Mentor Graphics is effort to remain leader in 'Industrial Internet'

By Christopher Alessi and Natascha Divac

FRANKFURT -- Siemens AG's planned acquisition of automation and industrial software provider Mentor Graphics Corp. is the German giant's latest play to stay competitive in the race to digitize heavy industry.

Siemens on Monday offered $37.25 a share in cash, equivalent to a 21% premium on Mentor's closing share price on Friday, giving the U.S. company an equity value of around $4 billion.

Wilsonville, Ore.-based Mentor, which has agreed to the acquisition, sells software and hardware design-automation tools for the development and testing of advanced electronic systems. Mentor's shares gained 18.3% to $36.30 in recent Nasdaq trading on Monday.

"It's a perfect portfolio fit to further expand our digital leadership and set the pace in the industry," said Siemens Chief Executive Joe Kaeser.

The deal is the latest effort by Siemens to expand its profitable industrial software and automation business, which provides tools for digitizing old-line factories.

Siemens has been a leader in the so-called Industrial Internet, a global effort to marry heavy industry with the Internet of Things. The endeavor aims to increase manufacturing efficiency and productivity by developing smart factories in which robotic machines share data over the web, while also enabling greater product customization on the shop floor.

Siemens and competitors, including General Electric Co. and Robert Bosch GmbH, have been working on digitizing their own manufacturing processes and developing software platforms and automation tools to sell to other industrial players.

In Germany, where manufacturing remains central to a thriving export economy, the endeavor is being driven by a joint effort of the private and public sectors, known as Industrie 4.0. The German government sees the initiative as a way for German firms to keep their competitive edge amid a resurgence of manufacturing in the U.S. and against less expensive emerging-market producers.

U.S. companies including GE have a similar initiative, known as the Industrial Internet Consortium, which includes Siemens and Bosch.

Since Mr. Kaeser took the top job in 2013, he has moved aggressively to strengthen Siemens's U.S. presence and to apply the company's digital capabilities to boost efficiency across its own industrial businesses, such as power generation and equipment for the oil-and-gas industry

In an interview earlier this year, Mr. Kaeser said Siemens's expertise in automating production lines and factories gives it an edge over rival GE. A spokesman for GE at the time said Siemens no longer maintained an edge in the field of automation.

GE has said it would invest $1.4 billion in its fast-growing software business this year.

Mr. Kaeser's first big push into the U.S. came in 2014 with the $7.6 billion acquisition of oil-equipment maker Dresser-Rand Group. Earlier this year, the company acquired U.S.-based simulation software provider CD-adapco, in a deal valued at roughly $1 billion. The integration of that privately held firm has helped boost growth at Siemens's Digital Factory unit, which last week posted a 10% rise in profit for the fourth quarter of fiscal year 2016.

Siemens said it expects to close the Mentor acquisition by the second quarter of 2017. It expects to generate synergies of EUR100 million ($108.6 million) in earnings before interest and taxes within four years. The transaction should contribute to earnings per share growth within three years after the closing, the company added.

Mentor had over 5,700 employees when its fiscal year ended Jan. 31. The firm generated revenue of approximately $1.2 billion with an adjusted operating margin of 20.2%.

Large Mentor shareholder Elliott Management Corp., which last month increased its stake in the electronics design company to 8.1%, committed to support the transaction, it said.

Write to Christopher Alessi at christopher.alessi@wsj.com and Natascha Divac at natascha.divac@wsj.com

(END) Dow Jones Newswires

November 15, 2016 02:48 ET (07:48 GMT)

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