Aug. 15 (Bloomberg) -- Cadence Design Systems Inc., the world's largest maker of programs for creating computer chips, scrapped a $1.6 billion bid for Mentor Graphics Corp., saying the board refused to negotiate.

Mentor plunged 26 percent on the Nasdaq after Cadence ended the bid. Cadence disclosed the $16-a-share hostile offer in June after Mentor rebuffed earlier advances. Mentor, which had called the price ``insufficient,'' suggested that the combination may have struggled to win regulatory approval.

Cadence, facing a slowdown in chip sales, planned to use the Mentor purchase to add semiconductor-testing software, speed up product design and cut operating expenses. Mentor's failure to cooperate, coupled with a U.S. economic slump, have made financing terms ``no longer attractive,'' Cadence said.

Cadence climbed 6.7 percent today after deciding to cancel the offer and buy back up to $500 million in stock instead. Based on today's closing price, the new program would allow Cadence to repurchase as many as 65 million shares, or about a quarter of the shares outstanding.

The San Jose, California-based company rose 48 cents to $7.64 at 4 p.m. New York time in Nasdaq Stock Market trading, the biggest gain since 2004.

Mentor fell $3.67 to $10.33, the largest drop in more than three years. Cadence's bid was 30 percent more than Mentor's closing price the day before the offer. Mentor used Goldman Sachs Group Inc. and Merrill Lynch & Co. as advisers on the transaction.

Mentor's Response

Cadence's withdrawal of the offer is ``inconsistent'' with its public statements and talks between the two sides, Mentor said today in a statement. Cadence faced challenges in getting financing for the deal and received multiple requests from regulators for information about the bid, suggesting a review would take a long time, Wilsonville, Oregon-based Mentor said.

Cadence dropped to a 13-year low last month after forecasting annual profit and sales that trailed analysts' estimates. Customers are sticking with older products for longer periods without upgrading, curbing new orders, the company said.

Combining operations with Mentor would have helped rein in costs, Cadence Chief Executive Officer Michael Fister said in June. The company's operating expenses rose 6 percent last year to $1.07 billion. Mentor also would have helped the company expand in the automotive and aerospace industries, Fister said.

To contact the reporter on this story: Nick Turner in San Francisco at nturner7@bloomberg.net

Last Updated: August 15, 2008 16:13 EDT