Micro Focus/Open Text: small peer
London-listed software group was built by acquisitions. But more purchases will be difficult
They say good things come in small packages. If so, Micro Focus is getting better by the day. This London-listed software group has halved in value since July, after a profits warning. Canada’s Open Text has scotched talk of a bid. Other potential bidders, like beleaguered shareholders, may puzzle over the value of the company.
At an enterprise value of roughly 3.5 times forecast recurring revenues, excluding upfront licence fees, Micro Focus looks cheap compared with other mature software groups. Open Text, which trades at over 5 times, cannot have liked what it found if it got as far as running the numbers on a takeover. Under UK Takeover Panel rules, the group’s public stance means it cannot easily mount a bid within six months.
Micro Focus shares fell 7 per cent to five-year lows of around £10 on Monday. What might another bidder pay? Open Text offers over 3 per cent growth per annum for its recurring revenues, according to Citi. It deserves its higher valuation. Perhaps if Micro Focus could find top-line growth its valuation would move towards that of its Canadian rival, lifting Micro Focus to £14. That will not happen soon. Micro Focus specialises in buying legacy systems and slashing overheads. Sales growth matters less. Yet cost-cutting will only take it so far in businesses as competitive as cyber security or big data.
Micro Focus has some well-regarded products such as Fortify in security and Vertica and IDOL in data. The last is a remnant of Mike Lynch’s old Autonomy business. These could raise a billion or so dollars. If so, that should bolster the balance sheet, not line the pockets of shareholders including chairman Kevin Loosemore. Last year Micro Focus sold SUSE, its largest division, for $2.5bn. The cash went to investors, when net debt was over two times ebitda, above peers.
Micro Focus was built by acquisitions. But in its current state more purchases, with cash or shares, will be difficult. As such, the Micro Focus package is at best right-sized.