HPE and Micro Focus Intend to Spin-Merge HPE’s Software Business

On September 7, 2016, Hewlett Packard Enterprise (HPE; https://www.hpe.com; NYSE: HPE) and Micro Focus (https://www.microfocus.com; LSE: MCRO.L) announced their intention to spin-off HPE Software and merge it with Micro Focus. The merger is expected to close in Q3 2017 (HPE fiscal year; equivalent to summer 2017).

Screenshots of HPE's and Micro Focus's merger announcements on September 7, 2016

Screenshots of HPE’s and Micro Focus’s merger announcements on September 7, 2016

In this article I survey the main facts available to date and attempt a first analysis of the merger with regard to the companies’ product portfolios in the areas of application development and application lifecycle management.

What we can expect to happen:

  • There will be about six to nine months of uncertainty, and possibly stagnation, too. HPE Software will most likely stop most new product investments and focus on executing spin-off, merger, and new formation under the Micro Focus umbrella.
  • HPE’s traditional ALM/QC product line, market leader in enterprise testing solutions, can be expected to stay and be maintained over a (very?) long period. HPE ALM/QC is exactly the type of product that Micro Focus’s strategy is specialized to tend and exploit.
  • It is unlikely that products will be merged or harmonized across Micro Focus’s product lines like Borland, Serena, and the HPE Software portfolio. Because this way Micro Focus can maximize profit from established mature products.
  • The future of HPE’s recent and forthcoming agile offerings will be open. HPE recently came up with a number of very promising new products like Mobile Center for mobile testing and ALM Octane for agile development. Micro Focus’s plans published so far don’t indicate what might happen to these products. The company will need future champions. However, not every product can become the pick of the bunch. Running many new investment areas would not be in line with Micro Focus’s operating model.

What We Know Today: HPE

HPE’s press release states:

  • The transaction will have a value of approx. $8.8 billion.
  • The transaction is currently expected to occur by the second half of HPE’s fiscal year 2017. (HPE’s fiscal year starts in November, it’s second half starts in May.)
  • The new company will continue under the name Micro Focus.
  • HPE shareholders will own 50.1% of the new combined company.
  • An HPE senior executive will serve on the board of directors of the combined company. In addition, HPE will nominate 50% of the independent directors to the combined company’s board.
  • The transaction will include HPE’s Application Delivery Management, Big Data, Enterprise Security, Information Management & Governance and IT Operations Management businesses.
  • The new combined company is expected to have annual revenues of approx. $4.5 billion, which will make it one of the largest pure-play enterprise software companies.
  • The new company is expected to have high profitability. It is claimed that this ensured higher levels of investment in growth areas.
  • Each product line will have a clear role in overall company performance (i.e., each product will need to demonstrate its profitability).

What We Know Today: Micro Focus

Micro Focus positions itself as a global infrastructure software company, committed to enabling customers to both embrace the latest technologies and maximize the value of their current IT investments. (see: Micro Focus At a Glance)

Micro Focus’s regulatory statement on the proposed merger sees potential to improve profitability of HPE Software’s businesses. Application of Micro Focus’s operating model is expected to raise HPE Software’s adjusted EBITDA margin of currently approximately 21% to Micro Focus’s equivalent margin of approx. 46% by the end of the third full financial year following completion of the merger. This applies to HPE Software’s mature software assets that represent approx. 80% of the business segment’s revenue.

According to a Financial Times article, Kevin Loosemore, Executive Chairman, Micro Focus, confirmed that the new company would have “total control” of the business despite the links to HPE on the board.

Micro Focus has a history of acquiring other software companies with well-established, mature product portfolios. The most prominent examples from the application lifecycle management and application development areas are Borland and Serena. Both product lines are positioned under their respective brands, while they can also be accessed via Micro Focus’s central products directory.