A weak currency is burnishing the UK market’s appeal to bargain hunters. The latest example is the agreement by Canada’s OpenText to buy software developer Micro Focus for £5.1bn, including debt.
The deal will spark debate over whether the UK undervalues tech stocks. With Aveva, Avast and Darktrace also heading for the exit — or considering it — the dwindling pack of software companies on London’s main market is led by Sage, Kainos Group and Bytes Technology.
Not that Micro Focus is a company to excite techno-nationalists. The company was built on the back of vintage software, not cutting-edge technology. Most of the workforce is in the US and India. Sales have been shrinking since 2020 and it is struggling with high debt levels equivalent to 5.5 times ebitda.
Those problems are reflected in the lowly multiple of six times ebitda OpenText plans to pay. But the price of £1.8bn offered for the equity is a generous 75 per cent premium to the three-month average price. The $100mn of extra cost savings — on top of those already planned by Micro Focus — will offset about four-fifths of that when taxed and capitalised.
This is a bold deal for OpenText, valued at $8.8bn after the shares fell 13 per cent on Friday. It will increase revenues in North America and Emea by a half, while doubling sales in Asia-Pacific and Japan. The deal will increase OpenText’s debt-to-adjusted ebitda to 3.8 times, though it should generate enough cash to cut that to under 3 in two years.
Roll-up strategies have a habit of coming unstuck when deals become too ambitious. Micro Focus’s 2017 $8.8bn purchase of HP Enterprise’s software business illustrates the point. OpenText is betting it can get the UK company, which has lost customers to cloud computing, growing again. It increased its own cloud revenue eight-fold over the past nine years. To succeed with Micro Focus it will need to pull off a similar feat.
