Tech

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Do not adjust your computer. A British software company has ventured to Palo Alto and pulled off a decent deal, sending its own shares up as much as 20 percent.

The applause for Micro Focus's $8.8 billion purchase of Hewlett Packard Enterprise's software business hard to argue with.

Deal Bounce
Micro Focus's market value surged on news of its deal with Hewlett Packard Enterprise
Source: Bloomberg
Intraday times are displayed in ET.

The company is funding most of the acquisition with new shares. HPE investors will get a 50.1 percent holding in the British software company, worth about $6.3 billion based on Micro Focus's closing price on Sept. 6. That looks like a controlling stake, but because it's going to HPE's disparate shareholders rather the company, in substance the deal amounts to a takeover by Micro Focus. The Newbury, England-based company will also pay $2.5 billion to HPE itself.

On these numbers, the bidder is paying more than 11 times the acquired assets' $738 million of underlying Ebitda in the year through April. By comparison, Micro Focus trades on 16 times.

What's more, Micro Focus sees scope to strip out heaps of cost -- the contribution to the corporate jet is top of the list of easy cuts. 

Suppose Micro Focus can double Ebitda margins from their current low twenties, boosting Ebitda to around $1.5 billion. That would lower the acquisition multiple to mid-single digits. Micro Focus's margins are almost 50 percent, but it doesn't automatically follow that it will be easy to replicate those in what it's just acquired.

For now, the market is giving it the benefit of the doubt. Micro Focus's market value surged to 5.3 billion pounds on Thursday, an increase of more than 700 million pounds.

HPE shareholders can celebrate too. Based on Thursday's share price, the new shares Micro Focus will issue to them have an implied value of 5.5 billion pounds ($7.4 billion). Add the cash payment to HPE itself and they're getting $9.9 billion from the deal -- about 13 percent more than what HPE negotiated on the basis of Micro Focus's share price before the transaction.

Should Micro Focus shareholders feel miffed that they have had to give away half the enlarged company and will only share in any upside created by the deal?

In theory, Micro Focus could have simply issued new stock to its own shareholders and used the proceeds to fund the acquisition in cash without diluting them. The snag is that this would have crystallized a potential $2 billion tax bill for HPE. That would have forced up the price for Micro Focus. Result: no deal.

There's a re-balancing here for U.K. technology industry, too. HPE includes the old Autonomy, the former standard bearer of British tech acquired by Hewlett Packard back in 2011. That deal quickly went sour. Autonomy is only a tiny part of the assets being acquired. In a way, this is a sad repatriation of damaged goods.

But it's still symbolic. The deal bulks up the U.K. technology industry after Softbank of Japan swooped in for ARM Holdings, chip designer extraordinaire to smartphone industry.

Forget sterling's troubles. British companies don't have to be cheap targets for overseas acquirers. Even with pound-denominated shares, they can be buyers too.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net