A company often touted as Britain’s next technology “champion” suffered a serious stumble yesterday when a business it is in the process of buying for $8.8 billion announced a steep fall in revenue.
Shares in Micro Focus fell more than 12 per cent in early trading yesterday, and closed the day down 5.6 per cent at £24.90, after it revealed that revenues in the software division of Hewlett Packard Enterprise had fallen by 10 per cent in the third quarter.
Micro Focus struck an agreement to buy the software assets of HPE last September in the largest deal in its acquisitive history. Kevin Loosemore, executive chairman of Micro Focus, claimed at the time that the deal would create one of the world’s largest infrastructure software companies.
He also said that there would be no problems integrating such a large business, telling The Times last September that it was a case of “click and repeat, basically”, referring to the group’s penchant for buying and integrating progressively bigger businesses.
Nevertheless, the City was spooked yesterday and analysts said that the decline in HPE’s software division, after a sharp fall in licensing and consulting sales, was “clearly concerning”, given the size of the deal.
News of the downturn at HPE also came just over two weeks before shareholders will be asked to vote on the deal and the return of about $500 million of cash.
Michael Briest, an analyst at UBS, said that the fall in the Micro Focus share price seemed “understandable” but he did not think that it would prompt shareholders to vote against the deal on May 26. “This is an unfortunate happening or event, but it is to be expected, given the magnitude of the change going on.
“In the long term, the accretive value of the deal will still be substantial.” However, he added: “They can’t have this happen too often.” Revenues were particularly vulnerable at software companies undergoing deals as the upheaval could cause licences to “bounce around”, Mr Briest said.
Mr Loosemore said yesterday that he was “excited” about the HPE deal, which is fully funded and has received all its regulatory clearances. “We are encouraged by the early progress that HPE Software’s management are making on implementing operational efficiencies and the speed of the change in the business,” he said.
“While the short-term decline in licence is disappointing, it is not unusual given the level of change being undertaken.”
Concerns have been raised that Micro Focus could have to work much harder to hit its target of boosting profit margins in the HPE operation by more than 20 percentage points in the next three years. Hitting a targeted 40 per cent profit level could meant that Micro Focus would have to sharpen its already well-hone tools for slashing costs and cutting overheads at underperforming businesses.
Mr Loosemore has said in the past that Micro Focus would be able to take advantage of the value in HPE’s software business because “we do a lot of boring things. We have a passion for running efficient businesses.”
He also has said that his paramount aim is to generate cash returns rather than simply chasing revenue growth, which he believes is an unhealthy “obsession” in the sector.
Micro Focus, which is advised by JP Morgan Cazenove, has said that after the integration of HPE software it expects its market capitalisation of about £5.7 billion to grow by more than two times.
Nicholas Hyett, analyst at Hargreaves Lansdown, said that the downturn at HPE’s software division was “clearly concerning”, but added that the group’s shares were still up more than 20 per cent since the $8.8 billion deal was announced.
Kevin Loosemore claims he once wondered whether he had made the right career choice when, as a fresh-faced 21-year-old Oxford graduate, he started at IBM only to be given stacks of dusty, dry computer programming manuals to read (Deirdre Hipwell writes). He has had many years and many bumper pay cheques since to realise that he probably did.
The executive chairman of Micro Focus has made his name with a series of bold and progressively larger acquisitions of rival, often underperforming, software businesses. Since his company listed in 2005 it has made more than £11 billion of acquisitions and Mr Loosemore’s ability to profitably integrate targets has resulted in handsome rewards for him and has made Micro Focus a stock market favourite. At the time of the listing, Micro Focus had a market capitalisation of £260 million. It has since risen to £5.7 billion.
Raised in Southampton, Mr Loosemore was the first person in his family to stay in full-time education past the age of 16. The plumber’s son read philosophy, politics and economics at Oxford. After working at IBM, De La Rue, Cable & Wireless and Motorola, he joined Micro Focus as a non-executive chairman before taking on an executive role.
For someone who could “easily pass for a middle manager in an accountancy firm”, Mr Loosemore has managed to upset some in the City. His lucrative pay awards (£12.5 million in 2014) have raised eyebrows, as has his joint role running the company on a day-to-day basis and chairing the board.
Bringing new life to ageing technology
Only a few years ago it was a little-known software company operating in the heartlands of Berkshire; now Micro Focus describes itself as a “global software company delivering and supporting software solutions that help customers innovate faster” (Deirdre Hipwell writes).
This means that Micro Focus helps some of the world’s largest companies to get the most out of the software and operating systems that they use. Kevin Loosemore, executive chairman of Micro Focus, likens what the company does to maintaining domestic plumbing.
Micro Focus is not a company designing flashy apps and software. Rather, it works with companies to help them to keep their existing, and sometimes ageing, IT systems going for as long as possible while they decide what new software they should invest in, if any. It is a specialist at linking old software technology to new, such as making old cash machines “talk” to the latest banking programs. Working in this sector can be hugely cash-generative, which is why Micro Focus typically has delivered returns of between 15 per cent and 20 per cent to shareholders each year.
Hewlett Packard Enterprise’s software division does roughly the same thing as Micro Focus, albeit with revenues that are more than double while its margins are less than half of those of the British company. That explains the rationale for the deal: Micro Focus thinks it can run HPE’s software division better. It will have to, especially now that it has hit an unexpected bump in the road after the “disappointing” decline in revenue at HPE Software.