OpenText is acquiring British rival Micro Focus, which has a poor growth outlook and has struggled with profitability since reporting a $3 billion loss in 2020.

That’s according to John Abbott, infrastructure analyst with 451 Research, part of S&P Global Market Intelligence. Micro Focus is one of the world’s largest enterprise software providers that serves thousands of organizations globally.

The $6 billion deal should close in the first quarter of 2023.

OpenText and Micro Focus’ biggest competitor is IBM.

S&P Global Market Intelligence’s John Abbott

“It’s an important deal as it combines two of the largest software roll-up companies into one,” Abbott said. “This is a huge, diverse portfolio of software. Much of it might be termed legacy software. But it’s still critical to a wide range of large customers running mission-critical enterprise applications and infrastructure.”

OpenText gets access to a business that generates lots of cash, he said. It also can reach a wider customer base committed to the products they are using. And it has high profit margins on maintenance and support.

Moreover, it presents a strategic opportunity to move Micro Focus customers onto OpenText cloud services.

Micro Focus Stock Price Collapse

“Dogged by integration challenges from the purchase of HPE’s software business, Micro Focus’ stock slid 86% between 2018 and the end of 2021,” Abbott said. “Its growth outlook is poor and it hasn’t yet been able to claw its way back to profitability since posting a heavy $3 billion loss in 2020. Yet, it can be argued, that Micro Focus’ most serious offenses had been factored into its stock’s price well before the general market decline. In fact, its 2022 midyear performance was in line with analyst expectations … even if the company has not yet found itself back in the green. In that sense, Micro Focus’ stock price has been penalized more harshly than recent performance warranted, as the market also began discounting tech sector stocks earlier this year. But Micro Focus is undeniably a high-cash generative business, and this is what OpenText is after.”

As public companies have become more affordable than ever, “ambitious and well-capitalized buyers” are on the hunt for troubled targets – like Micro Focus and Zendesk – whose vulnerabilities are only amplified by current market conditions, he said.

OpenText Can Turn Micro Focus Around

The Micro Focus purchase is a smart move by OpenText, Abbott said.

“Micro Focus has seen its share price decline for the past two years, but its fundamentals have remained strong,” he said. Moreover, “there’s an opportunity for OpenText to turn the business around. And it has the tools and expertise in place to do so — such as the Titanium cloud integration platform it has recently announced.”

Micro Focus has many products that will be too difficult or too expensive to shift to the cloud, Abbott said.

“OpenText will have to decide what the future of those products will be — end-of-life, dispose of, stop active development, or continue development and support,” he said. “It’s likely to be more ruthless than Micro Focus, which may put pressure on some customers to migrate, or to pay much higher custom support and maintenance fees.”