Hewlett Packard Enterprise (NYSE: HPE) announced plans for a spin-off and merger of its non-core software assets with British enterprise software company Micro Focus (LSE: MCRO) in a deal valued at $8.8 billion.

At the completion of the transaction, currently expected to occur by the second half of HPE’s fiscal year 2017, HPE shareholders will own American Depositary Shares (ADSs) representing 50.1% of the equity of the new combined company (which will continue under the name Micro Focus) on a fully diluted basis.

The equity stake in Micro Focus is valued at $6.3 billion based on the closing price of Micro Focus shares as of market close on September 5, 2016. HPE will also receive a $2.5 billion cash payment prior to the completion of the merger, resulting in total consideration to HPE and its shareholders of $8.8 billion. The transaction is expected to be tax-free to HPE. The deal is subject to customary closing conditions, including regulatory approvals and approval by Micro Focus shareholders.

The combination of these software assets — which includes HPE’s Application Delivery Management, Big Data, Enterprise Security, Information Management & Governance and IT Operations Management businesses — and Micro Focus’ highly complementary portfolio, will create one of the world’s largest pure-play software companies. The combined company will have revenues of approximately $4.5 billion, creating one of the world’s largest pure-play infrastructure software companies with a global footprint, nearly 4,000 salespeople worldwide, and deep R&D resources to deliver best-in-class solutions to customers and partners.

“Today’s announced spin-merge of our non-core software assets with Micro Focus is another important step in our strategy to unlock a faster growing, higher margin, stronger cash flow company,” said Meg Whitman, president and chief executive of HPE. “We believe that the software assets that will be a part of this combination will bring better value to both our customers and shareholders as part of a more focused software company committed to growing these businesses on a stand-alone basis.”

“The proposed merger with HPE Software is consistent with our recent acquisitions of Serena Software and the Attachmate Group,” said Kevin Loosemore, executive chairman of Micro Focus, who will lead the combined company. “The combination of Micro Focus with HPE Software will give customers more choice as they seek to maximize the value of existing IT assets.”

As part of the deal, HPE and Micro Focus also announced their intent to enter into a commercial partnership naming SUSE as HPE’s preferred Linux partner.

An HPE senior executive will serve on the board of directors of the combined company. In addition, HPE will nominate 50% of the independent directors to the combined company’s board.

To recognize the $8.8 billion of value and unlock a more attractive financial profile for HPE going forward, HPE expects to incur one-time after-tax separation costs of approximately $700 million, with the vast majority occurring in fiscal year 2017.

HPE is an enterprise information technology company based in Palo Alto, Calif. On November 1, 2015 HPE was spun off the Hewlett-Packard company commonly known as HP, which retained its personal computer and printing business, and now trades as HP Inc. (NYSE: HPQ).

Micro Focus is a global enterprise software company helping customers innovate faster with lower risk. Its software helps customers build, operate and secure IT systems that bring together existing business logic and applications with emerging technologies to meet increasingly complex business demands.

Photo: Meg Whitman, President and CEO of Hewlett Packard Enterprise.



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