What's going on?
Shares of Micro Focus, a little-known but rapidly expanding British tech behemoth, fell more than 5% on Tuesday after it announced that a software business that it recently acquired is performing worse than expected.
What does this mean?
In September last year, Micro Focus spent almost $9 billion buying an ageing software business from Hewlett Packard Enterprise (HPE). Micro Focus isn’t your typical tech company – instead of developing new software, it usually buys old software companies and works to keep them relevant. The plan is for Micro Focus to improve the efficiency of the old HPE business and make it significantly more profitable (i.e. increase its margins).
It’s not off to a good start: on Tuesday, Micro Focus warned that revenue at its newly acquired business dropped 10% in the most recent quarter as companies bought less of its software.
Why should I care?
For markets: The news doesn’t necessarily imperil the turnaround plans.
Typically, making a newly acquired company more profitable means cutting costs and/or pairing its products with the purchaser’s own line-up in order to drive new revenue growth. Since Micro Focus has yet to take full control of the business (the deal doesn’t formally “close” until September), its ability to turn things around will be better judged once it’s had more of a chance to shake things up.
The bigger picture: Buying struggling businesses is not easy.
Micro Focus has been here before: it lost a big chunk of its value in 2011 when its profits dropped sharply following other large acquisitions. The business model of turnaround specialists such as Micro Focus, which exist in virtually all industries, requires that they find struggling companies to turn around. So, it’s not terribly surprising that a recent acquisition would be, you know, struggling!