Micro Focus Has Mega Problems

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What's going on?

Shares of the UK’s biggest tech company you’ve never heard of, Micro Focus, fell almost 20% on Monday after it appeared that its $9 billion acquisition of parts of Hewlett Packard Enterprise (HPE) wasn’t going to plan.

What does this mean?

Micro Focus is a software company, and the largest tech business whose shares trade on the London Stock Exchange. But bigger isn’t always better: the company clocked in profit and revenues over the last six months that fell short of investors’ expectations – and it predicted that turnover in 2018 would be lower than research analysts had thought.

The problem is partly down to Micro Focus’ integration, or lack thereof, of almost $9 billion worth of software businesses that it purchased last year from HPE. The deal hugely increased Micro Focus’ size – catapulting it into the exalted ranks of Britain’s FTSE 100 stock index – but sales figures at the acquired businesses have so far fallen short of the company’s aims, much to investors’ chagrin.

Why should I care?

The bigger picture: Takeovers have a bogeyman, and it’s called integration risk.

When a company announces a big acquisition, investors often sell its shares (at least at first). This pessimistic reaction reflects the risks that the acquiring company is taking on. Micro Focus is experiencing some of those hiccups now: its existing operations are struggling to grow as the company is focusing (ba dum chh) on the integration, while the acquired businesses aren’t performing as hoped (although it’s still early days).

For markets: Investors appeared to blanch at the company’s plans to, er, buy more businesses (tweet this).

Micro Focus moved its Chief Financial Officer to a newly created role as Head of Mergers and Acquisitions, suggesting that acquiring other companies remains a strategic priority (it also explicitly said that it will continue to look for such opportunities). This means investors will likely be asked to shoulder even more integration risk in the future – just as the company is struggling to swallow its latest acquisition.

Originally posted as part of the Finimize daily email.

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