The combined company, which will operate as Micro Focus and be run by its executives, will have annual revenues of about $4.5 billion. After the transaction closes, Micro Focus’s Board of Directors will include an HPE Senior Executive and HP Independent Directors on the Board. HPE shareholders will retain 50.1% of the combined entity, but Micro Focus executive chairman Kevin Loosemore insists:
We have total control of what is happening. We are effectively buying their business . . . HP will have no share of this business once the deal is done.
The deal will be the biggest acquisition of a foreign tech firm by a UK company, something which may be seen as significant post-Brexit vote and coming in the wake of the sale of ARM Holdings to Softbank. Micro Focus was founded in 1976 and is headquartered in Newbury, Berkshire. It employs more than 4,500 people in more than 80 global locations, with about 20,000 customers worldwide.
Loosemore calls the deal a significant milestone and an opportunity for the UK firm to scale internationally. As executive chairman, Loosemore has engineered a series of acquisitive deals of late, including the $1.2 billion purchase of Attachmate in 2014 and the $540 million takeover of Serena Software earlier this year. He says:
The merger will create one of the world’s largest infrastructure software companies with leading positions across a number of key products. It represents a compelling opportunity to create significant value for both companies’ shareholders. The combination will give customers more choice as they seek to maximize the value of existing IT assets, leveraging their business logic and data along with next-generation technologies to innovate in new ways with the lowest possible risk.
The deal also brings Autonomy home to the UK following the 2011 acquisition by HP as it then was, a takeover that is deservedly seen as one of the most mishandled in history. The takeover, which took place under the short-lived time that former SAP CEO Leo Apotheker ran HP, cost an initial $11 billion, followed by billions of dollars in write-offs and (strongly denied) accusations of financial impropriety on the part of Autonomy management.
So for HPE CEO Meg Whitman, offloading Autonomy’s remains as part of a software bundle that includes Mercury Interactive, Vertica and ArcSight, must be a bonus. Yesterday however she focused on the benefits to customers and employees of the divestiture:
Micro Focus's approach to managing both growing and mature software assets will ensure higher levels of investment in growth areas like Big Data Analytics and security, while maintaining a stable platform for mission-critical software products that customers rely on.
For employees Micro Focus's approach will mean each product line will have a clear and important role in the overall company performance and employees will have a high level of clarity on the strategy for their organization. It also means employees will get to work on long-term customer focused projects and the software technology that they love.
We believe the software assets that will be a part of the spin-merge will bring better value to our customers, employees and shareholders as part of a more focused software company committed to growing these businesses on a standalone basis.
She added that stability was a key consideration:
This is what Micro Focus does. They are pure play software company who is expert at managing mature software assets. And as Micro Focus will tell you, most people who work in the software business and Silicon Valley want to grow assets. Actually some of these assets should actually be maintained on a stable platform that extends the value for customers and it’s actually not what we do, it is what they do.
The software move follows the announcement in May that HPE is to merge its technology-services division with Computer Sciences Corp. in a deal valued at about $8.5 billion. As to why Whitman and her team opted for a spin-off with Micro Focus rather than an outright sale of the whole software business, she explained:
The reason is because our shareholders will be able to ride the upside of what Micro Focus does. Remember our shareholders will own 50% of the new company.
This was a much better alternative than selling the company today on a PE multiple operating income, because you get cash, but you pay taxes and then our shareholders wouldn't get to ride the upside unless they went out and took new money to buy those shares.
The spin-off does mean changes at HPE of course, with the current head of the software business Robert Youngjohns, becoming EVP for Strategic Business Development and reporting directly to Whitman. Whitman also added responsibility for the remaining core HPE software assets to Chief Operating Officer Chris Hsu’s remit and insisted there is a job to be done here:
To be clear both software and services are still key enablers of HPE's go forward strategy. Our newly created software-defined and cloud business will build upon key software assets, like OneView and the Helion Cloud platform, to deliver software defined hybrid IT solutions like synergy. HPE's composable infrastructure offering that enables customers to operate their workloads with unprecedented speed and agility.
But for HPE, it is a slimmed-down, leaner operation, she concluded, and not before time:
Maybe back in the day it was great to be a technology supermarket like the financial supermarkets of yesterday. What I am pretty sure of is the next four or five years is going to be all about speed, agility and focus and innovation in something that is a more narrow focus.
The probable sale of the HPE software assets was no secret, but the identity of the buyer certainly took most of us by surprise. Clearly the devil will be in the detail in how successfully this merger is executed, but the markets love the idea, sending the Micro Focus share price soaring by over 20%.
As a Brit, in these uncertain post-Brexit vote times, it’s cheering to see a UK firm pulling this off. I find myself in agreement with long-time UK software and services market watcher Richard Holway when he says:
I do applaud the sheer courage and ambition…in taking Micro Focus to a world class and global-sized UK HQ-ed software group. Post deal, Micro Focus will have a market value of c£10b. It is an amazing achievement which has reversed the story I have had to write so often of UK HQ-ed companies being acquired.