Open Text to buy U.K.’S Micro Focus
US$6-BILLION TAG
Canada’s Open Text Corp. agreed to buy U.K. software firm Micro Focus International PLC for about US$6 billion including debt, building on a strategy of growth by acquisition with its largest deal yet.
The Waterloo, Ont.-based company is offering 532 pence per share, a 99 per cent premium to Thursday’s closing price. Micro Focus soared 94 per cent to 521 pence as of 2:08 p.m. London time on Friday.
It’s Open Text’s largest acquisition to date, according to BMO Capital Markets, and the firm doesn’t plan to issue equity to fund it. Instead, it intends to raise US$4.6 billion in new debt, draw US$600 million from an existing credit line and use cash on its balance sheet. The shares dropped as much as 10 per cent in U.S. premarket trading.
Newbury, U.k.-based Micro Focus sells enterprise software to thousands of organizations including Airbus SE, Hewlett Packard Enterprise Co. and Kellogg Co., according to its website.
Its products help companies with cybersecurity, IT operations management, communications and messaging. Micro Focus says it does business with a majority of the Fortune Global 500.
But the company has seen declines in its revenue and adjusted earnings before interest, taxes, depreciation and amortization every fiscal year since 2018.
“We expect Micro Focus to be a multiyear turnaround story,” CIBC analyst Stephanie Price said in a note to investors that downgraded the stock to neutral and cut the price target to US$44 from US$51. “We see upside if Open Text is able to turn the Micro Focus business around faster than expected.”
Under chief executive Mark Barrenechea, Open Text has made a series of deals to bolster its software portfolio in recent years, including email encryption company Zix Corp. and cybersecurity firm Carbonite Inc.
The Micro Focus acquisition is notable for its relative size: it’s worth nearly half of Open Text’s current enterprise value of more than US$12 billion, according to data compiled by Bloomberg.
“Micro Focus brings meaningful revenue and operating scale to Opentext, with a combined total addressable market of US$170 billion,” Barrenechea said in a statement. “With this scale, we believe we have significant growth opportunities and ability to create upper quartile adjusted Ebitda and free cash flows.”
In an interview with Bloomberg last year, Barrenechea bemoaned the price of deals, saying the company’s desired targets were “too expensive, too overvalued.” The correction in technology stocks has brought valuations down quickly.
Open Text is paying 2.2 times Micro Focus’s pro forma revenue for the past 12 months. The company said it sees the deal closing in the first quarter of 2023.
Bloomberg first reported Open Text’s interest in Micro Focus in 2019.