Synopsys, Inc. (SNPS.US) acquires ANSYS, Inc. (ANSS.US) approved by China, Morgan Stanley: Final hurdles cleared, EDA leader position will be strengthened.

Morgan Stanley released a research report stating that the State Administration for Market Regulation (SAMR) of China conditionally approved the acquisition of ANSYS, Inc. by Synopsys, Inc. for $3.5 billion. The bank believes that this development is seen as the last major regulatory hurdle being cleared for the transaction, and that this merger will strengthen Synopsys, Inc.'s position in the Electronic Design Automation (EDA) market in the long term. It is understood that the approval comes with several conditions. These include Synopsys, Inc. divesting its optical and photonics simulation business, and ANSYS, Inc. separating its power analysis software related businesses. Both companies must also maintain existing contracts with Chinese customers, including prices and service levels, without bundling products. Additionally, related EDA tools must support industry standard formats, maintain and renew interoperability agreements with Chinese customers, and reach interoperability agreements with third-party EDA suppliers at the request of Chinese customers, without unreasonably terminating or refusing to renew existing contracts with Chinese customers. Morgan Stanley believes that these conditions are basically consistent with those proposed by regulatory agencies in Europe and the United States, and interoperability is a standard practice in the EDA industry. The clause prohibiting the refusal to renew contracts with Chinese customers may be related to safeguarding the future use of related tools by Chinese customers, especially considering the previous proposals by the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce to restrict the export of EDA tools to China (which have since been canceled). The transaction has been under review for some time due to the tense trade situation between China and the U.S., as well as the export controls that chip design software may face. Obtaining approval from Chinese regulators is a positive development for Synopsys, Inc. Morgan Stanley points out that this is the last major obstacle before the completion of the transaction, and expects the deal to be completed soon, with the company potentially providing updates on the progress at an earnings conference around August 20th. In the long term, Morgan Stanley believes that this merger will strengthen Synopsys, Inc.'s position in the EDA market. The bank has maintained a "hold" rating for Synopsys, Inc. with a target price of $540.