Philip Carnelley IDC

Philip Carnelley
Research Director, European Software Group

Read full bio  @Pcarnelley

Hewlett Packard Enterprise (HPE) amazed the IT world, and gave a major fillip to the European (and particularly British) software industry, when it announced its intention to spin off its HPE Software unit and merge it with Micro Focus, in an unusual deal valued at almost $9 billion. HPE will receive around $2.5 billion in cash, while its shareholders will receive shares in the new business valued at $6.3 billion.

As a result, U.K.-headquartered Micro Focus will almost quadruple in size, to around $4.5 billion in annual revenue when the deal closes, expected in mid-2017. This would catapult Micro Focus well into software’s global top ten and it will become the second largest European software company by sales (after SAP), according to IDC’s global software tracker.

The new, combined company’s portfolio will be extensive, comprising application development, testing and deployment tools, middleware, big data/analytics, enterprise security, information management, IT operations management, and Linux software. Most of these are mature product lines, essential to large enterprises such as bank, telcos and government, with real ‘stickiness’ – and potentially very profitable. Micro Focus has proven adept at managing such businesses in recent years, and its shareholders have benefited accordingly, with a rising stock price and dividend payments.

IDC notes that:

  • While HPE shareholders will gain a 50.1% stake in the new entity, and HPE products will comprise up to 75% of its revenues, it will be headquartered and listed in the U.K., led by current Micro Focus Exec Chairman Kevin Loosemore and CFO Mike Phillips. HPE will nominate half of the independent directors.
  • The new business will be a major force in the software quality and testing arena, boosting HPE’s market leadership with Micro Focus’ own testing business. However, plans for rationalizing a significant product overlap are yet to be laid out.
  • HPE will retain software capabilities for its software-defined infrastructure initiatives, critical to its hardware development efforts.

HPE has clearly taken the view that coordinating its hardware and software operations was not working. DNA, culture, and metrics were difficult to align across business groups, and cross-sell arguments were weak. It looks plausible to IDC that Micro Focus can make more of these assets: it has a recent track record of assimilating large players in mature software fields, including Borland, parts of Compuware, and Attachmate. The latter was twice the size of its acquirer.

Repeating the performance will still be challenging, however.

First, Micro Focus must demonstrate skill at operating non IT-infrastructure oriented businesses. Both IDOL and Vertica take Micro Focus outside its heartland into new areas of business-solution focus, and will need a different sales and marketing strategy. The IDOL business has been shedding revenue and customers since HP’s ill-fated Autonomy acquisition in 2011. Even so, some of its IP is in a very hot area: cognitive/artificial intelligence systems technologies, offering great potential.

Second, Micro Focus is taking on a larger and more diverse set of businesses than it has ever done, with strong leaders and cultures. Since HPE’s software revenue assets are more than three times Micro Focus’s, we’d expect that HPE’s software people will be a real force in the new company, one that needs to be harnessed. That said, Micro Focus can put its own folk at the top, unchallenged:  Robert Youngjohns, HPE EVP and current software head, will remain at HPE, while Frank Vella, VP of HPE Software worldwide sales and Tony Caine, head of HPE Software EMEA, both left HPE a few weeks ago.

Kevin Loosemore has been quoted as saying, “We have a passion for running efficient businesses.” That statement will be fully tested. But, more than that, he and CFO Phillips need to drive opportunities for the growth products (or sell them off as going concerns), while nurturing mature products with low growth potential. Micro Focus’s methodology of software portfolio management, developed and refined over recent years – with different strategies for ‘core’, ‘growth’ and ‘optimize’ opportunities – will be tested to the full.

With strong and even visionary leadership, that rare beast, a true European and global tech champion, could be formed. This is the new Micro Focus’s challenge and opportunity.

If you want to learn more about this topic and European software trends, please contact Philip Carnelley or visit ourResearch page.