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Synopsys (SNPS), an electronic design automation software supplier used to test and design chips, sold off with under an hour to go in Friday's session on a WSJ report that it was potentially looking into acquiring Ansys (ANSS), an engineering simulation software developer. Further details of the rumored transaction materialized after the close on Friday. Reuters reported that Ansys was receiving takeover offers for over $400 per share, a roughly 17% premium to Friday's opening price.

With no deal formalized, there is no guarantee that Ansys will be acquired by Synopsys, or any company for that matter, or if it will ink a deal at a price tag exceeding $400/share, underscored by Ansys still trading well below those levels. Reuters noted a formal announcement should be made within the next few weeks.

• Why would a Synopsys/Ansys acquisition make sense? Ansys has been developing engineering simulation software for decades, steadily expanding its competitive advantage by penetrating numerous industries through its software's wide application range. Because of the high level of training involved, Ansys' simulation software is costly to switch off from, providing the company with a defensive revenue stream. While Ansys' top line did underwhelm last quarter, this was largely due to the U.S. Department of Commerce's additional export restrictions to certain Chinese businesses, a likely short-term headwind.
• Ansys also commands excellent margins, maintaining gross margins of over 90% in Q3, highlighting management's ability to keep expenses in check. However, by that same token, it does not leave much room for Synopsys to come in and slash bloated expenses, keeping a cap on potential synergies.
• So why did shares of Synopsys drop rapidly on reports of an Ansys takeover? The suspected price Synopsys would pay to add Ansys software to its arsenal was too high. If Synopsys were to purchase Ansys for $400 per share, it would translate to approximately 15x estimated FY23 revenue and 46x adjusted earnings, meaningfully above several other software tech giants like ORCL, ADBE, and CRM.

Reports Synopsys could formally offer at least $400 per share for Ansys were met by an immediate backlash by Synopsys investors, primarily because of the lofty price tag. Ansys boasts a sizeable economic moat given its extensive history, embedding itself in numerous industries, and high switching costs. However, Ansys' revenue has cooled recently, slipping into negative territory in Q3 as China restrictions weighed. Still, adding Ansys would be an excellent move for Synopsys over the long run, especially as semiconductor content increases, with short-term stock fluctuations creating attractive entry points.