UPDATED 16:54 EDT / SEPTEMBER 07 2016

NEWS

HPE to sell most of its software business to UK-based Micro Focus

Hewlett-Packard Enterprise Co. (HPE) said today it has agreed to sell much of its software business to U.K.-based Micro Focus International plc for $8.8 billion.

HPE shareholders will get a 50.1 percent ownership of the combined company, but HPE will not have a controlling interest. HPE will maintain an ongoing presence on the Micro Focus board, and take a $2.5 billion cash payment.

HPE Chief Executive Meg Whitman (above) made the announcement Wednesday as the company announced earnings that beat Wall Street estimates on a small decline in revenues. Although shares were down more than 2 percent in after-hours trading initially, they recovered to decline only a small fraction after the earnings conference call.

The software sale includes HPE’s application delivery management, big data, enterprise security, information management and governance, and IT operations management businesses. But it does not include the Helion hybrid cloud infrastructure platform, which Whitman said is a critical part of HPE’s strategy to “become the leading provider of hybrid IT that will run customers’ data centers today, bridge them to the cloud for tomorrow and prepare them for edge computing and Internet of Things in the future.”

The deal amounts to a divestiture of its software applications portfolio, but not of the systems software products that are core to its cloud and infrastructure management strategy. “We still want to be in the software business, just not in application software,” Whitman on the conference call.

The 40-year-old Micro Focus, which got its start selling Cobol compilers, has been on an acquisition binge recently, buying The Attachmate Group Inc. for $1.2 billion in 2014 and Serena Software Inc. earlier this year for $540 million. Its previous acquisitions included Novell Inc. and  Linux vendor SUSE. As part of the deal, HPE and Micro Focus said they’ll form a commercial partnership that will make SUSE HPE’s preferred Linux partner and merge the HPE Helion OpenStack cloud deployment and Stackato development platforms with SUSE’s OpenStack.

Micro Focus has a market capitalization of $4.45 billion on 2015 revenues of $843 million. The acquisition is expected to roughly quintuple its annual revenues to $4.5 billion. Micro Focus Executive Chairman Kevin Loosemore will lead the software division. Robert Youngjohns, who currently leads HPE’s software business, will become executive vice president of strategic development. HPE Chief Operating Officer Chris Hsu will also take on the remaining software business.

The deal is a homecoming of sorts for Autonomy Corp. plc, the Cambridge, England-based big data software maker that Hewlett-Packard Co. bought for $10.2 billion in 2011. HP subsequently took an $8.8 billion write-down on that deal amid allegations that Autonomy executives had manipulated financial figures to raise the value of the company. Autonomy continues to be a key element of the company’s big data product line, though.

Micro Focus said it expects to improve the margin on HPE’s software assets by approximately 20 percent within three years. HPE shareholders will see the benefit of any efficiencies through their holdings in the joint venture.

On the earnings front, HPE’s performance was strong, despite unexpected weakness in its storage business. Revenues of $12.2 billion were down 6 percent from the prior year, but only 1 percent when adjusted for divestitures and exchange rates. Net earnings were 49 cents per share, handily beating Wall Street estimates of 44 cents. Cash flow grew 10 percent and the company returned $1.5 billion dollars to shareholders in repurchases and dividends.

HPE has been aggressively paring its portfolio since breaking from HP Inc. last November. In May it said it would merge its enterprise services business, which accounts for more than a third of its revenues, with Computer Sciences Corp.

Challenged by one analyst to justify the company’s failure to complete more acquisitions or grow its top line since last November, Whitman was resolute that the strategy she announced at that time is playing out as planned. “We look at our portfolio in terms of what we need and add or divest based upon our core strategy,” she said. “We’re still in the services business, but it’s a different kind of business. It’s a matter of matching the portfolio to the strategy that we see as our competitive advantage.”

HPE has done enterprise acquisitions, including Aruba Networks Inc. and Silicon Graphics International Corp. (SGI), and Whitman said they’re examples of the portfolio strategy’s strength. “I think you can look for more small acquisitions like Aruba and SGI. It’s entirely consistent with the strategy we laid out a year ago,” she said. “I’m seeing the value of focus every single day. The next four or five years are going to be all about speed, focus, agility and innovation in areas that are increasingly narrow.”

Whitman said the more focused HPE will be strongly positioned against Dell Technologies Inc. and Cisco Systems Inc. because HPE’s product line covers computer, storage and networking components. Neither of those competitors has all three elements.

She also said the cost-cutting that was an overhang of the combination with HP Inc. is nearing an end. “Frankly, we’ve got to have corporate overhead designed for a $28 billion company,” she said. “When we started, we had corporate overhead design for a $140 billion company.”


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