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The Price of M&A: After Gutting HP, Autonomy Strikes Again

Summary:
Micro Focus plunges 46% today, six months after its .8 billion acquisition of Hewlett Packard Enterprise. Shares of Micro Focus plunged 47% at the moment on the New York Stock Exchange and closed down 46% on the London Stock Exchange — six months after the company had completed the .8 billion acquisition of Hewlett Packard Enterprise (HPE), which included Autonomy that HP had calamitously acquired in October 2011. Today’s dive wiped out another .5 billion in market capitalization, on top of the self-inflicted damage that the Autonomy acquisition had previously done to HP. Micro Focus shares are now down 60% from November 2017, just after the HPE acquisition had closed. Why the plunge? Micro Focus announced this morning that CEO Chris Hsu had “submitted his resignation in

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Micro Focus plunges 46% today, six months after its $8.8 billion acquisition of Hewlett Packard Enterprise.

Shares of Micro Focus plunged 47% at the moment on the New York Stock Exchange and closed down 46% on the London Stock Exchange — six months after the company had completed the $8.8 billion acquisition of Hewlett Packard Enterprise (HPE), which included Autonomy that HP had calamitously acquired in October 2011. Today’s dive wiped out another $6.5 billion in market capitalization, on top of the self-inflicted damage that the Autonomy acquisition had previously done to HP.

Micro Focus shares are now down 60% from November 2017, just after the HPE acquisition had closed.

Why the plunge?

Micro Focus announced this morning that CEO Chris Hsu had “submitted his resignation in order to spend more time with his family and pursue another opportunity,” effective “immediately.”

The company also disclosed that it has a revenue fiasco on its hands. On January 8, it had forecast a revenue decline of 2% to 4%. That was bad enough. Today, a little over two months later, it scuttled that forecast. It now expects a revenue decline of 9% to 12% for the six months ending April 30.

In other words, its projections can no longer be relied on: Two month after making projections, the company finds itself again in a different world. For the whole year, it forecasts a revenue decline of 6% to 9%, likely to be slashed further over the next few months.

It blamed the HPE acquisition and lists this smorgasbord of what went wrong:

  1. Issues relating to our new IT system implementation, which have impacted the efficiency of our sales teams, our ability to transact with partners and our cash collection;
  2. Higher attrition of sales personnel due to both integration and system related issues;
  3. Disruption of ex Hewlett Packard Enterprise global customer accounts as a result of the demerger of Hewlett Packard Enterprise; and
  4. Continued sales execution issues particularly in North America.

Micro Focus Executive Chairman Kevin Loosemore said this about the architect of this acquisition:

“I would like to thank Chris Hsu for his leadership, tireless energy and enthusiasm over the past 15 months and wish him well in his new venture. Chris was instrumental in achieving the carve out of the HPE Software business in order that it be merged with Micro Focus. He has led a repositioning of the HPE Software portfolio to the needs of today’s market and put in place a plan to increase our effective product investment as we integrate the companies.

So good riddance.

HPE was HP’s software division that included the misbegotten, ludicrously overpriced $11.7 billion acquisition in 2011 of Autonomy Corporation, an enterprise software company based in the UK. At the time, HP executives were desperate to transition the company to software. And they did so after surgically removing their brains.

HP eventually wrote off $8.8 billion of the value of Autonomy. In November 2015, it split into two companies, HP and HPE. And in late 2017, it sold HPE to Micro Focus.

Federal prosecutors filed charges in November 2016 against Autonomy executives, alleging that starting in 2009, they attempted to deceive investors about the company’s performance, financial condition, and prospects for growth. According to the indictment, the objective was to manipulate up the share price and make the company attractive to potential buyers. The trial began last month in San Francisco federal court.

Now Autonomy and HPE strike again. This time at investors of Micro Focus.

But at first, as is usually the case, it was nothing but hype. On September 1, 2017, when the HPE acquisition was officially completed, Micro Focus gushed:

  • “Combined company becomes world’s seventh largest pure-play software company, largest UK technology firm listed on London Stock Exchange, with revenue of $4.4 billion.”
  • “Merger brings together two software leaders with focus on helping customers extend existing software investments while embracing innovation in a world of Hybrid IT.”

The company also raved about its strategy of growing by acquisition over the past three years “in series of major moves,” including The Attachmate Group, Serena Software, and HPE Software.

The HPE deal was a “transformational transaction,” it said elsewhere. It’s certainly very transformational for investors who’re getting once again cleaned out.

But somebody came out ahead in all these deals – in addition to CEOs and other top executives who reaped huge bonuses and stock compensation packages: Wall Street. It takes its cut from every merger and spinoff and acquisition. Alone on the Micro Focus acquisition of HPE, the last leg so far in the series, Wall Street banks and advisors extracted upwards of $260 million in fees. Ka-ching.

But Wall Street never sleeps: iHeartMedia finally filed for bankruptcy. Read…  Bain Capital Wins Again: $20-Billion Leveraged-Buyout Queen Topples, Biggest in Years, Another Private Equity Casualty

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Wolf Richter
Founder, Wolf Street Corp. In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China.

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