While HPE is getting $2.5bn in cash, the whole deal value is more like $8.8bn, the non-cash being stock. More details:
- “Under the deal, HP Enterprise shareholders are expected to end up with Micro Focus shares currently valued at about $6.3 billion. Micro Focus will pay HP Enterprise $2.5 billion in cash.” (WSJ)
- There’s about 12,000 people in HPE Software. (WSJ)
- HPE Software revenue: “HPE’s software unit generated $3.6 billion in net revenue in 2015, down from $3.9 billion in 2014.”
- Put another way, from TBR: “2Q16 software revenue [had a] decline of 18% year-to-year, driven down by a license revenue decline of 28% year-to-year.”
- HPE has been divesting a lot, getting a hoard of cash: “In earlier transactions, HP Enterprise in May completed a $2.3 billion deal in China to sell a 51% stake in a venture there called H3C that sells networking, server and storage hardware and related services. Later the same month, HP Enterprise announced a deal to spin off a computer services business that employs about 100,000 people—two-thirds of the company’s total head count—and merge it with operations of Computer Sciences Corp.”
- Also: “The company sold at least 84 percent of its 60.5 percent stake in Indian IT services provider Mphasis Ltd to Blackstone Group for $1.1 billion in April.”
What now for HPE?
- This makes HPE, I think, what we’d call a “systems” company.
- That’s a lot of cash that could be used to acquire all sorts of other assets:
- Some financials spreadsheet wizard could figure this out better than me (the terms of the CSC “merger” are weird and I don’t know how to subtract out the $47bn of “liabilities” HP has on its balance sheet), but not including whatever they got from CSC, this gives HPE a cash hoard of about $15.7bn, which includes “cash and cash equivalents.”
- If you really want to goose it for your M&A spree dreams, throw in $2-5bn in whatever CSC brought and random i-banker stock-swap, loans, and etc. “deal structure” nonsense…and you’re looking at the $20bn range. There’s plenty of valuation chaos in the startup ranks, and in the bigco ranks as well. Whatever whacky scenario you can dream is only limited by dry-cleaned imagination.
- However, looking at the HPE earnings call, that’s probably way high after dividends are paid out and if I understand the proceeds from CSC: more like $1bn.
- The assets are a “large fruit salad“: “The software assets include areas such as application delivery management, big data and enterprise security, the Palo Alto, California-based company said Wednesday in a statement” (Bloomberg)
- Or, as the Micro Focus press release puts it: “HPE Software brings additional breadth and depth across IT Operations Management, Software Delivery & Test, Enterprise Security, Information Management & Governance and Big Data Analytics.”
- On the Linux front: “Micro Focus and HPE also announced as part of the transaction the intent to enter into a commercial partnership naming SUSE as HPE’s preferred Linux partner.”
- That’s nice, but you’d have to be insane to shutout RHEL. As I covered back at 451, once SUSE got unwound from the synergies of Novell, their business took off. But with just RedHat’s 50%+ market share in the Linux market (and that’s from around 2011, over there in Gartner land – I bet it’s grown since then, at least for paid Linux), that’s a big pie chart to spin into your favor.
- 451 says that SUSE accounts for ~20% of Micro Focus’ (pre-deal, I assume) revenue.
HPE’s cloud plans
- I like this framing from Scott Fulton over at TheNewStack: “One frank admission that Whitman gave investors on Wednesday was that HPE, as a platforms company, was not interested in helping customers maintain legacy environments.”
- Cloud software, on OpenStack and Cloud Foundry, as Simon Phipps points out: “Combines the strong OpenStack bench SUSE has been building with HPE’s OpenStack team in an unspecified way.” This assumes that the HPE OpenStack folks are part of the deal, which is uncertain as many parts of cloud were, last I knew, considered hardware at HP.
- The Micro Focus press release suggests that OpenStack and Cloud Foundry stay with HPE, saying they’re still sorting partnerships there: “… exploring additional collaboration leveraging SUSE’s OpenStack expertise for joint innovation around HPE’s Helion OpenStack and Stackato Platform-as-a-Service solutions. SUSE and HPE are working together to define the specifics of the commercial partnership.”
- Indeed, TBR sums up the HPE cloud group: “OneView and Helion Cloud platform will form part of a new product group that enables HPE to better bundle them with HPE hardware. In July, HPE announced the departure of SVP of HPE Storage, Manish Goel, alongside Bill Hilf, SVP of HPE Cloud. Moving forward, Ric Lewis will head a new unit called the Software-Defined & Cloud Group, which will house Helion CloudSystem and Helion OpenStack. This union of some remaining software assets with hardware assets further highlights software’s future role in enabling HPE’s hybrid IT roadmap.”
- Whitman on the “hybrid cloud” strategy HPE has: “You have to approach this by workload or by application. Which ones really are likely to move to public cloud, which are likely to stay locked down in [enterprise] data centers, and which are likely to end up in on-prem private clouds? We have to make sure the on-prem private cloud is cost competitive. We need to gain share in those traditional data centers.”
On the a buyer, the “Wizard Parent” at Micro Focus
- Micro Focus is a twisty, turny PE structure. 60% or so is public and 40% is owned by a PE firm holding company called, of all things, “Wizard Parent LLC” made up of a sort of super-band of tech PE groups: Elliott, Francisco Partners, Golden Gate Capital, and Thoma Bravo. No Silverlake or Vista; way back in 2009, BlackRock had a 6% stake in Micro Focus. (Wikipedia)
- Micro Focus is no slouch, financials wise: “Since 2011, Micros Focus has produced average annual shareholder returns of 39%, a performance which has bolstered investors’ favourable view of the company’s management team…. Its shares have risen by 60% over the last year.”
- From the stock swap, HPE share holders will own 50.1% of Micro Focus, begging the question: who are those share holders, at least the large ones?
- Other Micro Focus purchases of late: NetManage ($73.3m in 2008), Borland ($75m in 2009, which had already sold off JBuilder and other dev tools to Embarcadero in 2008 for $30m), QA tools from Compuware ($80m in 2009), Progress ($15m in 2013), Attachmate/Novell/SUSE ($1.2bn in 2014), and Serena ($540m in 2016). (Unlinked figures from Wikipedia)
- And, of course, the merger with Attachmate in 2014 for $1.2bn, all stock and bringing in the Wizardly ownership structure above. Worth noticing is that the company near tripled revenue with that deal and, according to 451, buying HPE Software will also near triple revenue.
Micro Focus, now
- This all gives Micro Focus a portfolio of: COBOL, CORBA, a lot of legacy focused dev/ALM/SDLC tools, whatever’s left of the Novell identity management empire, solid footholds in the Linux and mainframe markets, a lot of ITIL-era systems management tools, Autonomy/CMS, cloud with SUSE OpenStack, and some other stuff I’m surely leaving off.
- So: if you’re a large organization that’s 20 years or older (which is many, if not “most all,” of the big, “enterprise” IT buyers out there like governments and numerous F500/G2000 types), Micro Focus has something to sell it you and has a good chance of already being one of your vendors.
- Clearly, they’re a legacy software shop, in the tradition of CA & friends. That list, plus the financial performance backs up Simon Phipp’s summary: “As for Micro Focus, I have every confidence that they will make good with this.”
- Mik Kersten on the dev tool/ALM strategies to choose from, growth or profit-reaping: “But with the dozens of new Agile and DevOps tools on the block, the competitive pressure will be high So we will either see this entrenched tool stack stall, with newer vendors chipping away at it as we saw with [IBM Rational] ClearQuest and ClearCase, or we will see continued investment in the innovation needed to modernize and grow this large customer base. I hope it is the latter, as this new entity will be in a very unique position to innovate the tool chain for large-scale software delivery.” Mik has operated in this market as the CEO of TaskTop for many years, partnering with HP, IBM, and other legacy Dev vendors to youthhify them, and their customers up. I.e., he’s credible.
I’ll update this as I find more and figure out what I fucked up above.
(Image from geralt.)