I was thinking about last week’s news that OpenText had acquired Micro Focus for $6 billion in cash. Mike Wizard did a good job write down in the news with his take on this here on DevOps.com (and if you’re interested in the implications for the security industry, Techstrong Research’s Mike Rothman talked about it too). While I don’t strongly disagree with Mike Wizard’s opinion, I have a slightly different point of view.
In my opinion, this is part of a trend we’re seeing with some of the biggest tech companies sitting or having access to a lot of cash. In tough economic times, cash is crucial, and it’s not uncommon for large companies to come in and pick up other companies and lines of business, usually on the cheap.
For example, Broadcom’s acquisition of VMware (although I don’t know if $61 billion is cheap). At first glance, the Micro Focus deal seems to fit the bill. I don’t think people believe OpenText overpaid based on these numbers:
- The total purchase price is 2.2 times Micro Focus’s preliminary revenue from TTM.
- The total purchase price is 6.3x Micro Focus pro forma, adjusted for TTM EBITDA.
However, I think there is more to this than meets the eye. By the OpenText CEO’s own admission, it will take at least eight quarters (two years) to integrate the Micro Focus portfolio into OpenText’s cloud delivery model.
In the meantime, Micro Focus is struggling to maintain profitability and previously announced a $300 million cost-cutting program that will continue post-acquisition. In addition, the company says it will cut costs by another $100 million in addition; This brings the total cuts to $400 million.
Where are the abbreviations from? It’s not that Micro Focus’s extensive portfolio of software products represents revolutionary new technology—quite the contrary. Micro Focus, through various acquisitions over the years, has largely taken over mature product lines from big tech brands that have shed unwanted or non-strategic software business lines. Of course, the HP/HPE deal was very different, but the result was not much different.
Some mature software has come under the control of Micro Focus, and Micro Focus has done a decent job of making sure these lines of business make as much money as they can. They didn’t actually “revive” this software, but the cycle was exhausted. Now OpenText says moving it to their cloud service over the next eight quarters will make a difference. I’m skeptical, to say the least.
I think it will be old software that will be two years older and will be delivered via the cloud. What needs to be done goes beyond just putting this software in the cloud – they have to make a commitment to actually restart it. Transfer it to cloud architecture; kill off some of the old product lines that are nearing the end of their life and, frankly, should have been thrown into the pasture some time ago. Of course, build on brand equity, but launch new software.
After all, $6 billion is a lot of money, but more money has been spent buying old software in the past. Without a much bolder plan from OpenText, just babbling about digital transformation and the cloud won’t be enough to make Micro Focus’s portfolio worth anything close to the amount of money they paid for it.
Like Mike Wizard and, I’m sure, many OpenText investors and Micro Focus users, I will be looking for signs that OpenText is not agreeing to port the old Micro Focus software to the cloud. Something more would be required to pay dividends on this deal.
I’m not saying it can’t be done. When this deal is closed, OpenText will become a software hub with a wide range of clients. Finding new software and services to sell to these customers is the key to this deal.