Consequenses of the Micro Focus HPE reverse takeover

Author: Herman Eggink, Asysco CCO

Let’s say you’ve chosen your “flavor” of Micro Focus COBOL and you’re currently enjoying the enhanced capabilities of COBOL programming, plus a reduction in cost compared to your previous mainframe licenses. Your plan was to stay in Micro Focus COBOL for at least a decade and that is your long-term strategy.

Now, nearly one year after Micro Focus and HP announced the reverse takeover of HP’s non-core software, the deal finally concluded on Friday Sep 1st 2017. According to the Financial Times, Micro Focus has made a virtue of buying legacy computer brands and wringing them for profitability by cutting costs. But the $8.8bn reverse takeover of Hewlett Packard Enterprise’s software assets is likely to prove more complicated.

In a recent interview, chairman of the board, Kevin Loosemore made it clear that the operating margin needs to improve from 21% to 45% in 3 years, as happened with all previous acquisitions (e.g. Attachmate). Loosemore said: “There are a lot of companies in this space that are trying to grow when they shouldn’t, as a result they were running their businesses at half the margin that we run the businesses at. These old companies are often trying to invent the next big thing — but they don’t really know what that is.”

Whilst he may have a point regarding growth and operating margin, isn’t this ultimately about creating customer value and ensuring you get paid fairly for the value you create? Doubling margin in 3 years for a company the size of HP is only possible through massive internal efficiencies where little optimization synergy exists pre-merger (the reverse takeover): less money is spent on R&D (longer term issue) and less service and support will be available for existing customers (short term issue).
This will no doubt impact the smaller product lines such as … Micro Focus COBOL, a product that quite a number of their customers still rely on for the core of their organization.

Hardly any R&D is spent on legacy to begin with (less than 1% of the top IT company’s R&D budgets is used for innovating mainframes, COBOL and such, it all goes to x86 and ARM/mobile). In that sense, this reverse takeover is very likely to end up being a reverse value creator for their customers.

According to the Financial Times, one top-10 shareholder describes Chairman Kevin Loosemore as “more a private equity type than a businessman”.

Do you really want to depend on a company that’s only about margin and is driven by a hunger for expansion?

“Our funding ability has increased now that we are bigger” Kevin Loosemore said in an interview. “There is no practical cap in terms of size of future deals.”

Sources:

ZDNet.com

Financial Times

Bloomberg.com