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Micro Focus's HP Software Purchase Puts It in the Big Leagues

Note: this is a reprint of an article originally posted on The Wall Street Journal. The original article can be found here.

LONDON— Hewlett Packard Enterprise Co. 's plan to spin off and merge its software business with Micro Focus International PLC, in an $8.8 billion deal, will triple the little-known British company's workforce and sales and lift it into the big leagues of European tech companies.

It also throws a spotlight on an obscure corner of the tech world. Micro Focus, founded in 1976, helps companies with long-established computer infrastructure update their information technology without having to replace their old systems. In one recent project, it helped Scandinavian Airlines parent SAS AB modernize its business-analysis capabilities.

Micro Focus's competitors include big software companies such as International Business Machines Corp. and Microsoft Corp. , as well as more specialized operators such as Red Hat Inc. After the HP Enterprise deal, Micro Focus will have combined annual revenue of $4.5 billion, up from $1.2 billion currently, making it one of the world's largest pure-play infrastructure-software companies, it said.

Under the terms of the deal, Micro Focus will pay HP Enterprise $2.5 billion in cash, and HP Enterprise shareholders will own 50.1% of the enlarged company following the issue of shares by Micro Focus, worth $6.3 billion. That makes it essentially a reverse takeover, though Micro Focus management will continue to run the new company. HP Enterprise will appoint one executive board member and other nonexecutive board members.

Micro Focus shares jumped almost 23% in morning London trading, giving it a market capitalization of around £5.5 billion ($7.3 billion), though it later surrendered some of those gains.

Based in Newbury, England, Micro Focus employs 4,300 people around the world. The deal will triple that staff, Micro Focus Executive Chairman Kevin Loosemore said in a call with journalists.

The deal originated when Mr. Loosemore contacted HP Enterprise around February, following the company's separation from HP Inc. last year, to find out what its postsplit strategy would be, he said.

The fall of the pound against the dollar after the U.K.'s June 23 vote to leave the European Union had "no real effect" on the deal, Mr. Loosemore said. The currency move boosted the value of Micro Focus's shares, but also made the cash portion of the dollar-denominated deal more expensive.

The Micro Focus deal is a rare example of a U.K. tech company making a big overseas acquisition. It is also a sort of homecoming for a chunk of the HP software business.

The Micro Focus acquisition involves the company taking over some of the assets that HP acquired when it bought U.K. data-software company Autonomy for $11.7 billion in 2011. Autonomy, which was run by co-founder Michael Lynch, was one of Britain's highest-flying tech firms before its purchase. After the deal, however, HP alleged fraud and wrote down a big chunk of the value of the deal. Mr. Lynch, who denies the fraud allegations, is fighting HP in court. He declined to comment Thursday.

The size and profile of the HP deal contrast with Micro Focus's status as one of a number of largely unremarkable U.K.-listed business-software providers.

The deal also represents the latest sign of progress for the company, which only five years ago posted a string of profit warnings, prompting a management shake-up and speculation that it could itself be subject to a takeover. Media reports at the time even suggested Hewlett Packard could be interested.

More recently, the company has regained its footing and moved to acquire several companies, including Houston-based peer Attachmate Group for $1.2 billion in 2014.

Micro Focus's status as one of the U.K. biggest listed technology companies was recently confirmed with news it would be promoted to the U.K.'s blue-chip FTSE 100 index to replace ARM Holdings PLC, which Japan's SoftBank Group Corp. recently acquired.

Micro Focus was founded by Brian Reynolds and Paul O' Grady in 1976 as a small operation in Notting Hill, London, specializing in Cobol, a software language that was developed in the 1950s.


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