The market had been expecting IT solutions business Micro Focus (MCRO) to make some sort of strategic giant leap, the surprise in today's news is that it hasn't involved the sale of the company, the seemingly most logical step. Instead, the Newbury-based company has made an altogether more ambitious roll of the dice, buying US peer The Attachmate Group in what amounts to a $2.35 billion reverse takeover.
Cross-sale synergies may be limited but there are several pluses to the deal, not least that it will leave the combined group trading on the London stock market, allowing UK investors access to reliable revenues, solid profits and hefty cash generation. The shares rally more than 13% to 955p, demonstrating how well this is going down with investors.
'For a long time we have talked about the potential of Micro Focus becoming an all applications modernisation company, today’s merger significantly moves Micro Focus closer to achieving this ambition,' says Panmure Gordon's George O'Connor. 'The acquisition has the same DNA, it is a large systems enterprise software company, with high profitability and is cash generative,' the analyst says.
'The combination of equity (£729.6 million or $1,184 million) and debt ($1,165.8 million) values the transaction at $2,349.8 million,' calculate analysts at Killik, 'or 2.45-times March 2014 revenue and 7.5-times earnings before interest, tax, depreciation and amortisation (EBITDA).'
Importantly, Micro Focus has also announces details of its proposed return of value worth 60p per share, or roughly £83.9 million, the umpteenth value return of the past three years or so since Shares first flagged the opportunity (see page 7 of PDF).
As Shares has explained several times in the past, Micro Focus supplies a range of application and infrastructure management applications on an international basis. The company’s software is used to build, manage, test and modernise applications built on legacy platforms, primarily using COBOL (COmmon Business-Oriented Language) programming.
Attachmate is headquartered in Houston, Texas, but also has global operations across four main business areas. The original core business provides terminal emulation and legacy modernisation solutions, NetIQ provides applications to manage complex distributed application environments and Novell provides enterprise productivity and collaboration tools. Finally, the company provides a range of applications to support SUSE Linux Enterprise environments.
Attachmate’s revenues for the year to March were $956 million and EBITDA was $312 million, giving a margin of 32.6%. Overall revenues have declined from $1.13 billion in 2012, primarily as a result of a sharp decline in Novell. Conversely, the SUSE product group has enjoyed strong growth while the NetIQ and Attchmate portfolios were broadly flat.
'While we cannot ignore the fact that Attchmate has been in decline as a whole, there are many things to recommend this deal,' explains Ian Spence, founder of IT consultancy Megabuyte. 'While there is no significant revenue synergy expected from the combination of the product portfolios, the nature of the product sets and the way in which they need to be managed is very similar,' the IT analyst says.
Importantly, the Micro Focus team has developed a proven model for managing a portfolio of products, some growing and some declining. It will now look to apply this model to Attachmate's portfolio and, if successful, it should enable the acquired business to improve its revenue trajectory as well as profit margins, down the line.
'The fact that the private equity investors are rolling over heir shareholdings gives a very substantial level of comfort to Micro Focus shareholders that there are no skeletons in the Attachmate closet,' Spence interestingly points out. 'The fact that they are passing the business into new ownership at a relatively modest valuation implies that they see potential upside in the merger over the next few years.'
'With an enterprise value of more than $4 billion, revenues of circa $1.4 billion and EBITA of around $500 million a year, this clearly puts the company in sight of the FTSE 100, which currently only has one software and IT services (SITS) constituent, Sage (SGE),' points out IT veteran Richard Holway today, founder of the TechMarketViews consultancy website.
'Equally importantly, there are already established and positive relationships between Micro Focus, its management team, and the new private equity shareholders,' concludes Megabuyte's Spence.