HP Enterprise to spin off and merge software arm with UK’s Micro Focus in $8.8-bn deal

Hewlett Packard Enterprise Co (HPE) yesterday said that it will spin off and merge its non-core software assets with Britain's Micro Focus International Plc in a transaction valued at approximately $8.8 billion.

HPE is one of the two companies that were created from the breakup of Hewlett-Packard Co last November - one focused on PCs and Printers and the other on corporate hardware, software and services. (See: Hewlett-Packard to split corporate hardware and PC and printer businesses)

"With today's announcement, we are taking another important step in achieving the vision of creating a faster-growing, higher-margin, stronger cash flow company well positioned for our customers and for the future," said Meg Whitman, president and CEO of HPE.

Under the terms of the deal, HPE shareholders will own 50.1 per cent of the combined company, which will operate under the name Micro Focus and run by its executives, and receive $2.5 billion in cash from Micro Focus.

The equity stake in Micro Focus is valued at approximately $6.3 billion based on 5 September closing price of Micro Focus. The transaction is expected to be tax-free to HPE.

An HPE senior executive will serve on the board of directors of the combined company. In addition, HPE will nominate 50 per cent of the independent directors to the combined company's board.

HPE expects to incur one-time post-tax separation costs of approximately $700 million, with the vast majority occurring in fiscal year 2017.

The merger of software assets include HPE's application delivery management, big data, enterprise security, information management & governance and IT operations management businesses.

The deal would bring an end to HP's ill-fated 2011 acquisition of British software maker Autonomy Corp for $11 billion in 2011.

HPE said that the new company will have the global footprint, agility and financial strength to drive software innovation across a comprehensive array of products. At the same time, the move enables a standalone HPE to realize its vision of being the industry's leading provider of hybrid IT.

The combination of HPE's software assets with Micro Focus is expected to create a business with annual revenues of around $4.5 billion.

The combined will have global reach with a diversified across product line spanning IT operations, security, information management, big data analytics, cloud, open source and development.

Micro Focus, based in Newbury, and with a market cap of £4.45 billion ($6 billion), has recently been on an acquisition spree in order to boost growth.

It recently acquired California-based Serena Software for $540 million, but the HPE software assets deal would be its largest purchase to date.

HPE has four divisions - Enterprise Group, which works in servers, storage, networking, consulting and support; Services; Software; and Financial Services.

In May 2016, the company agreed to sell its Enterprise Services division to its competitor, Computer Sciences Corporation in a deal valued at $8.5 billion.

HPE's software division generated revenues of $3.6 billion in 2015, down from $3.9 billion in 2014.

Meg Whitman has recently cut jobs, and has said that she wants to focus the company on servers, storage, networking and related technology.

Post closing, HPE expects to have about $28 billion in annual revenue, down from $52 billion in its last fiscal year ending in October, and way below the $100 billion annual revenue when HP was at its peak.

HPE said that post closing of the Micro Focus deal, HPE will be an industry leader in delivering secure hybrid IT solutions, leveraging its world-class portfolio of software-defined servers, storage, networking and converged infrastructure.

"Services and Software remain key enablers of HPE's go-forward strategy," said Whitman. "HPE will double down on the software capabilities that power and differentiate our infrastructure solutions and are critical in a cloud environment."