opentext m&a

OpenText acquires MicroFocus – Our Analysis

OpenText buys the MicroFocus for $6B – Our Analysis.

Yesterday OpenText announced its plans to buy UK software firm MicroFocus. The fact that MicroFocus has been sold was hardly surprising as the firm has been on a terrible decline for years. Its stock price was around $32 in 2017, dropping to a low of approximately $3 in 2020. Its revenues have also declined by about 4-5% YOY, racking up losses. In short, MicroFocus was a company in big trouble.

So why would OpenText be interested in buying MicroFocus? Well, forget the conventional wisdom; here’s why this makes sense for both OpenText and its investors: 

  • Micro Focus has an annual software maintenance stream of nearly $1.8 Billion. 
  • This revenue is incredibly sticky; customers tend not to rip and replace. Thus renewal rates are in the mid-90 %. 
  • Even factoring in a continued 5% YOY decline for five years, that maintenance stream alone pays off the deal in under four years. 
  • OTEX doesn’t need to sell any more new deals, but they will, so that’s all gravy. 
  • The long tail of maintenance can run for 10-15 years post-merger with only minimal R&D investment. 
  • Note that OTEX is still collecting annual maintenance from some of my old Alchemy customers 17 years after the acquisition! 

For sure, some work will need doing here to merge the companies and, over time, to prune away some of the 296 products listed on MicroFocus’s website. But the underlying fundamentals make sense; it’s not sexy, but it should provide a solid business return. Furthermore, OpenText has long been a Private Equity firm that isn’t technically a PE. So the MicrosFocus deal is in line with OpenText’s overall PE-oriented M&A strategy. $6B is a lot of money to part with, and this is OpenText’s biggest deal to date, dwarfing its previous Carbonite & EMC Documentum acquisitions. Plus, Microfocus has around 11,000 employees, so unraveling and absorbing this British giant will take time. It’s not a deal without risks, but its a huge one and, on paper at least, a solid one

BTW: If you are a customer of OpenText or MicroFocus and wondering how this deal may impact you, we have a free – yup, free – confidential advisory service for you. A service that means all you have to do is find a time on our calendar.

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