The Price of M&A: After Gutting HP, Autonomy Strikes Again

Micro Focus plunges 46% today, six months after its $8.8 billion acquisition of Hewlett Packard Enterprise Software.

Shares of Micro Focus plunged 47% at the moment on the New York Stock Exchange and closed down 46% on the London Stock Exchange — six months after the company had completed the $8.8 billion acquisition of Hewlett Packard Enterprise Software (HPE), which included Autonomy that HP had calamitously acquired in October 2011. Today’s dive wiped out another $6.5 billion in market capitalization, on top of the self-inflicted damage that the Autonomy acquisition had previously done to HP.

Micro Focus shares are now down 60% from November 2017, just after the HPE acquisition had closed.

Why the plunge?

Micro Focus announced this morning that CEO Chris Hsu had “submitted his resignation in order to spend more time with his family and pursue another opportunity,” effective “immediately.”

The company also disclosed that it has a revenue fiasco on its hands. On January 8, it had forecast a revenue decline of 2% to 4%. That was bad enough. Today, a little over two months later, it scuttled that forecast. It now expects a revenue decline of 9% to 12% for the six months ending April 30.

In other words, its projections can no longer be relied on: Two month after making projections, the company finds itself again in a different world. For the whole year, it forecasts a revenue decline of 6% to 9%, likely to be slashed further over the next few months.

It blamed the HPE acquisition and lists this smorgasbord of what went wrong:

  1. Issues relating to our new IT system implementation, which have impacted the efficiency of our sales teams, our ability to transact with partners and our cash collection;
  2. Higher attrition of sales personnel due to both integration and system related issues;
  3. Disruption of ex Hewlett Packard Enterprise global customer accounts as a result of the demerger of Hewlett Packard Enterprise; and
  4. Continued sales execution issues particularly in North America.

Micro Focus Executive Chairman Kevin Loosemore said this about the architect of this acquisition:

“I would like to thank Chris Hsu for his leadership, tireless energy and enthusiasm over the past 15 months and wish him well in his new venture. Chris was instrumental in achieving the carve out of the HPE Software business in order that it be merged with Micro Focus. He has led a repositioning of the HPE Software portfolio to the needs of today’s market and put in place a plan to increase our effective product investment as we integrate the companies.

So good riddance.

HPE was HP’s software division that included the misbegotten, ludicrously overpriced $11.7 billion acquisition in 2011 of Autonomy Corporation, an enterprise software company based in the UK. At the time, HP executives were desperate to transition the company to software. And they did so after surgically removing their brains.

HP eventually wrote off $8.8 billion of the value of Autonomy. In November 2015, it split into two companies, HP and HPE. And in late 2017, it HPE sold its software division to Micro Focus.

Federal prosecutors filed charges in November 2016 against Autonomy executives, alleging that starting in 2009, they attempted to deceive investors about the company’s performance, financial condition, and prospects for growth. According to the indictment, the objective was to manipulate up the share price and make the company attractive to potential buyers. The trial began last month in San Francisco federal court.

Now Autonomy strikes again. This time at investors of Micro Focus.

But at first, as is usually the case, it was nothing but hype. On September 1, 2017, when the HPE acquisition was officially completed, Micro Focus gushed:

  • “Combined company becomes world’s seventh largest pure-play software company, largest UK technology firm listed on London Stock Exchange, with revenue of $4.4 billion.”
  • “Merger brings together two software leaders with focus on helping customers extend existing software investments while embracing innovation in a world of Hybrid IT.”

The company also raved about its strategy of growing by acquisition over the past three years “in series of major moves,” including The Attachmate Group, Serena Software, and HPE Software.

The HPE deal was a “transformational transaction,” it said elsewhere. It’s certainly very transformational for investors who’re getting once again cleaned out.

But somebody came out ahead in all these deals – in addition to CEOs and other top executives who reaped huge bonuses and stock compensation packages: Wall Street. It takes its cut from every merger and spinoff and acquisition. Alone on the Micro Focus acquisition of HPE, the last leg so far in the series, Wall Street banks and advisors extracted upwards of $260 million in fees. Ka-ching.

But Wall Street never sleeps: iHeartMedia finally filed for bankruptcy. Read…  Bain Capital Wins Again: $20-Billion Leveraged-Buyout Queen Topples, Biggest in Years, Another Private Equity Casualty

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  35 comments for “The Price of M&A: After Gutting HP, Autonomy Strikes Again

  1. Si
    Mar 19, 2018 at 12:59 pm

    Wash, rise, repeat.
    “Do mergers work” asks a shareholder
    “See that Ferrari outside that big mansion? I own those. Of course they work” says the CEO/PE owner.

    • Javert Chip
      Mar 19, 2018 at 8:13 pm

      Defining “success” is somewhat problematic, but in my readings and (very) humble experience, only 20-25% of M&A is successful.

      I’d also guess the bigger the M&A deal, the higher the risk of failure. Merging disparate corporate cultures is almost impossible.

  2. Nick Kelly
    Mar 19, 2018 at 1:35 pm

    And bankruptcy of Claire which specialized in ear- piercing but is being partly blamed on-line shopping. (?)

    And the debt from LBO which seems more likely.

  3. Richard
    Mar 19, 2018 at 2:07 pm

    Wolf,
    I would love to see a comprehensive study of the actual economic impact of LBOs and M & A.
    I have said for years that that the cumulative impact is negative, as these transactions typically are justified after significant job cuts, leveraging up the balance sheet and thus raising the cost of capital and increasing credit risk, and the integration of similar yet different entities results in a brain drain that is also never recovered from.
    RLC

    • Mar 19, 2018 at 2:57 pm

      I ran across a study some time ago that agrees with your observations. But when M&A fever is surging, like right now, what matters is stock price, executive compensation, and fees. And to heck with the rest.

      Then there’s the additional problem that M&A of large companies create oligopolies or near-monopolies (in health care), which then extract a huge price from the overall economy by price gouging.

      • Paulo
        Mar 19, 2018 at 8:33 pm

        An article on CNN site today explained how a woman was charged $12,000 for 1.5 hours in emerg for a bee sting. She had insurance, it just didn’t cover those doctors or facility.

        She had to pay it herself. Talk about monopolies and consequences.

        • Frederick
          Mar 19, 2018 at 9:08 pm

          I was charged 4K for a tetanus shot and thought that was bad My boss paid a much reduced bill of 600 I believe still outrageous I got bitten by a stray dog here in Turkey and the rabies shot cost me 11 dollars at the emergency room Somethings WAY out of whack in American medical care

        • Anon1970
          Mar 28, 2018 at 6:32 pm

          No, talk about a screwed up US health care system. Lots of people pay nothing because they have no money and no insurance and the hospital and doctors are left with trying to get something from Medicaid or local taxes or passing their costs along to patients who can pay or have adequate insurance.

          I have good medical insurance and my maximum out of pocket expense would be about $6,000 this year. My coverage includes worldwide emergency treatment.

          About a decade or two ago, when the cost of medical care / medical insurance was already a growing problem, Republican politicians managed to distract the public with bogus issues like gay marriage and abortion. The butcher’s bill has now come due.

  4. biffula
    Mar 19, 2018 at 3:56 pm

    An LBO crushing yet another company. Imagine that.

    • Javert Chip
      Mar 19, 2018 at 7:56 pm

      I don’t think this was an LBO (that’s an entirely different way to get into trouble).

      HPE bought Autonomy, and in 2016 federal prosecutors indicted Autonomy’s (presumably ex-) executives for defrauding HPE (HPE was not indicted; they were simply amazingly stupid).

      Why anybody in their right mind would even look at this turkey until criminal actions had been settled (let alone actually buy this basket of crap) is mind-blowing.

  5. Kent
    Mar 19, 2018 at 4:16 pm

    Funny, I used to work for EDS which became a part of HP & then the vestiges showed up in HPE. And, at the time (mid-90’s) I wrote code in Micro-Focus Cobol.

    It’s fascinating how much devastation the leadership of HP has caused the world over the last 20 years.

    • kevin
      Mar 19, 2018 at 11:05 pm

      Kent, all empires become evil once they become big enough and then they decline, to be replaced by smaller rivals who will strive to become the next (business) empire.

      I was once part of good and honest company that unwittingly transformed into an evil empire. The funny thing is that being good and honest was what initially won over their customers, suppliers & employees, but with greater heft and market dominance, the tendency is to eat up the market in the unending quest for forever-growth.
      It helps when management bonuses is accelerated further via M&A, so they always inevitably turn evil.

      To give Meg some credit, she DID try to scale back down the business with the disposal of HP Software and also her massive break-up of the behemoth into HPQ and HPE. Her rational was to reduce complexity and improve responsiveness to the market, but strangely she still did not relinquish power until last year when she finally left the board of HPQ.
      I guess you can call that the responsible thing to do or you could say better two bonuses than one?

      If you think HP is fascinatingly devastating over the past 20 years….wait till you see what Google, Amazon or Facebook market dominance will wrought in the next 20 years. Neither was HP the pioneer in being devastating. Remember the Standard Oil monopoly back in the early 1900s? I guess not.

      With all the Googlers and Amazonians’ high-brow management and blackbox algos making all kinds of decisions for you … from grocery favorites, to pre-selected suggestions for your date and yes facial recognition of your emotional response to active advertising, I think more devastation is here. lol.

      HP is already a has-been sometime back. I doubt they will have a turnaround story unless Steve Jobs reincarnates and joins them as their CEO to do what he did with his formerly rotten Apple.

      With some benefit of perspective, I’d like to think all this is just a process of creative destruction. Who knows? 20 years later, Google might become the next “has-been” and be superseded by the next fanciful start-up turned behemoth.

      • William
        Mar 20, 2018 at 2:47 pm

        Meg did not ‘decide’ anything. Her playbook is provided to her by outside consultants. I’ve been part of corporate strategy teams that know how she operates.

        • kevin
          Mar 21, 2018 at 1:06 am

          Great Williams…did the outside consultants also decided on her bonuses in lieu of their own consultancy services fees too?

          Care to share how much did HP pay for those “outside consultants” to do her strategic thinking for her?

          I guess all of us have a small part in the heinous crime. lol.

  6. Fernando
    Mar 19, 2018 at 4:18 pm

    True story: this morning my Uber driver was an 81y/o ex banker from Merrill Lynch…he was extremely knowledgeable. He drove me for approximately 45 minutes, during which we discussed LBO and failures of business such as Toys r us, Kmart, etc…he admitted that is nothing more than just legalized fraud!!!

    • Paulo
      Mar 19, 2018 at 8:36 pm

      81, ex banker, and still working? Boy, what a career. He could finish up as a WalMart greeter if he plays his cards right. Tragic.

      • Javert Chip
        Mar 19, 2018 at 9:48 pm

        I thought Walmart “repurposed” all greeters into…well…something other than greeters.

        How much does an 81-year-old have to pay for car insurance to drive others around NYC?

        • fajensen
          Mar 20, 2018 at 10:37 am

          Nothing –

          Uber doesn’t “do” regulation & stuff so if one dies or get crippled for life in an Uber ride, Uber will maybe send a link to their very convenient app-based “sue the driver”-service together with the best wishes for a happy outcome :).

  7. govinda
    Mar 19, 2018 at 4:36 pm

    As a customer of HP for many years I saw the early implosion in the late 90s. I myself worked for a company a few years back that basically split itself and the offshoot I remained with then went about gutting itself to try and make it an attractive purchase – which never happened.

    Management types who do this kind of crap need to be hung from lamp posts.

  8. Ed
    Mar 19, 2018 at 6:32 pm

    Often CEO’s and M&A supporters will say you have to consolidate to compete v. China, Europe, etc.

    Cross-border competition is the cudgel that gets government policy, taxation and regulation, to suit companies.

    I really am not sure what can be done about this, short of making tax policy equivalent across borders. And I don’t expect that to happen in my lifetime.

    • Beard681
      Mar 20, 2018 at 11:01 am

      What we need:
      1. A VAT to take care of cross border profit shifting and tax havens.
      2. Outlaw or tax as return to shareholders stock buy backs. (They were only legalized in 1982.)
      3. Bankruptcy 6 year claw back on dividends for private equity holders.
      4. Market rate interest rates, not artificial rates for banks and the rich.

      • Javert Chip
        Mar 20, 2018 at 2:00 pm

        VAT is the national road to hell.

        Current French VAT tax @ 20%; Denmark @ 25%.

        You crank up the corporate taxes that much and they will go off-shore & do business with and American subsidiary.

  9. Mike G
    Mar 19, 2018 at 7:35 pm

    It was the software division of HPE spun off and bought by Micro Focus. HPE still exists, without its spun-off software and Enterprise Services divisions.

    • California Bob
      Mar 19, 2018 at 9:41 pm

      Thanks. I was confused, because IIRC ‘Wonder Woman’ Whitman just conjured up a blow-out quarter for HPE, right?

      I interviewed at Micro Focus about a year ago. Thought I was interviewing for HPE (where I had worked for over 13 years many moons ago). Didn’t get an offer; looks like I dodged a bullet as layoffs are likely coming soon.

  10. Alex
    Mar 19, 2018 at 8:35 pm

    HPE is still a public company focusing on hardware. HPE Software was what MicroFocus acquired.

  11. Mch
    Mar 19, 2018 at 8:44 pm

    Hewlett and Packard must be rolling in their graves. This is what happens to all companies built on its leaders and couldn’t figure out what to do afterwards. It might take another twenty years, but Tim Cook will tank Apple if it kills him. If nothing else he will set Apple on the path to irrelevancy.

    • Mike G
      Mar 19, 2018 at 10:08 pm

      HP was built on its epmployee-focused corporate culture. Then the fast-buck vandals swooped in, thought they could slash and burn all the cultural supports to cut costs and make even more money, and killed an essential element that made it successful, not that the arrogant trash would ever admit it.
      Since then it’s been a continuous cycle of cost-slashing, idiot-game reorganizations and MBA clueless bombasts like Meg Whitman, with a continuing slide down the down.

  12. raxadian
    Mar 19, 2018 at 8:47 pm

    Never ever buy a company that had a leveraged buy out unless you wanna sink.

    Wolf ‘Leveraged Buy Outs” should ve called Leveraged Hollowing Outs because they remove everything valuable while leaving an outer shell that still looks like a profitable company… until you see the red numbers.

  13. Night-Train
    Mar 19, 2018 at 9:30 pm

    Micro Focus Executive Chairman Kevin Loosemore….

    That is an unfortunate name.

    • Mch
      Mar 19, 2018 at 10:06 pm

      You have to look closely, but they are extremely focused. Just a bit hard to see, because it’s a micro focus.

      Would it be better if his name was Looseless?

      • Night-Train
        Mar 20, 2018 at 12:26 am

        “Would it be better if his name was Looseless?” For his brand, I would think so.

        Micro focus is good for some things, but the downside is not being able to see the big picture. Of course, right now I am looking at the big picture and I still can’t figure out what i am seeing. :)

  14. ZeroBrain
    Mar 19, 2018 at 10:08 pm

    Can anyone think of LBOs or major acquisitions which DID work? If not, heck, this might make a good investment strategery :) Go short a basket of acquiring companies and long the overall market index in equal amounts.

    • Mar 20, 2018 at 12:15 am

      These HP-related deals weren’t LBOs (“leveraged buyout”) but regular buyouts. Which means there was a lot less debt involved. And they were supposed to be “strategic” acquisitions and for the long term, not the 5-7 year time frame typical for an LBO.

      But to your question: LBO’s work if PE firms can unload them in time. IPO’s are perfect for that because prices are high and some of the money will be used to pay down the debt. Hilton is an example of where the PE firm got out in time via an IPO and the money raised helped pay down with the debt. There are other examples. They key is that PE firms have to be able to unload their LBOs. If they can’t, the thing curdles.

      • Cmoore
        Mar 21, 2018 at 3:50 am

        Dollar General was an LBO that worked or has worked so far.

  15. Tang
    Mar 20, 2018 at 3:38 am

    HP, Microfocus. Dealings in current times. Management aspirations up-to-date. That is about all. Both very legacy in IT business although it seems like yesterday.
    Then we owned data centers. Have 100s of big small servers. Required software engineers to write and maintain our applications. It was big business. Big Blue.
    It is now the era of the cloud. The serverless centric emphasis. The era of apis and thousands and thousands of libraries that cater to programming fantasies. The all prevailing web and generating apps on the web.
    Java could now be yesterday. N0dejs becoming the centralised software supervisor and running on the all pervasive cloud. You never know.

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