Micro Focus Embiggens Mightily With HP Software Buy

September 12, 2016 Timothy Prickett Morgan

Two years ago, Micro Focus started building out its software empire in legacy systems with the acquisition of the Attachmate conglomerate, a company that was bigger than itself at the time. And now, Micro Focus has done it again, this time by eating the bulk of the software that is currently owned by Hewlett Packard Enterprise, which has lost all urges to try to build a complete hardware-software-services stack like IBM used to have back in the 1990s and 2000s.

HPE, which is the part of the Hewlett-Packard empire that includes the Four Ss of servers, storage, switching, and services, was separated from the HP Inc half of the company, which peddles PCs and printers, back in November 2015. In May, HPE decided to sell off its systems integration and outsourcing services business to Computer Sciences Corp for $4 billion, including a substantial stake in that services firm that is worth $4.5 billion. CSC will be paying a cash dividend of $1.5 billion to shareholders of the bigger services company, which will have about $26 billion in annual revenues and which is run by former IBMer Mike Lawrie. CSC is also taking on $2.5 billion of debts associated with the HP Enterprise Services business, which is the remains of the old EDS services business that the former HP bought in 2008 for $13.9 billion.

The deal that places the HP Software group in the hands of Micro Focus is a spinoff-merger, just like the CSC deal was, but in this case, HPE is keeping a 50.1 percent controlling stake in the new Micro Focus. The legacy application modernization and Linux supplier–remember, Attachmate owned SUSE Linux as well as Novell, NetIQ, and WRQ–is paying HPE $2.5 billion in cash, but HPE will have to spend $700 million to extract the software business from itself and pass it over. HPE reckons that its stake in Micro Focus is worth around $6.3 billion as the deal is getting done.

What is not clear is how HPE will reckon any profits it gets by virtue of its stakes in CSC and Micro Focus. In a certain way, it is still in the enterprise services and enterprise software businesses, but it won’t be taking any of the heat for things when and if the financials go south in these businesses. The funny bit is that the resulting HPE, which will be focused exclusively on servers, storage, and networking for IT shops of all shapes and sizes, will be about a $28 billion company. That’s much smaller than IBM, which is running at about $85 billion a year, thanks in large part to its services business, and Dell, which just ate EMC and VMware to pump itself up to $74 billion a year. The core systems businesses of these three giants are roughly the same, however, if you strip out consulting and other nonsense from IBM’s revenues and PCs from Dell’s revenues.

It is a three horse systems race, with HPE and Dell having hyperscale systems businesses with razor thin margins and IBM trying to build one through the OpenPower rebel alliance to the Intel Xeon platform.

Much of the software that Micro Focus is getting from HPE has very little bearing on IBM i shops. There is a broad portfolio of acquired software for managing systems and applications, as well as a number of databases and analytics tools, but it seems very unlikely that the latter will ever be ported to IBM i, although the former could get IBM i hooks.

The interesting part of the Micro Focus deal is that HPE is going to be tapping SUSE Linux as its preferred Linux distribution and melding its Helion OpenStack into SUSE Linux’s OpenStack distribution.

SUSE Linux was an enthusiastic supporter of IBM System z mainframes and Power Systems servers from a long time back, but in recent years IBM has been pushing Canonical’s Ubuntu Server and Red Hat’s Enterprise Linux on Power-based iron, particularly OpenPower machinery that it sells such as the Power Systems LC line. SUSE Linux is the preferred distribution by SAP for its HANA in-memory database, which stands to reason since both SUSE Linux and SAP are Germany companies. IBM could get funky about HPE owning a majority stake in SUSE Linux, which it essentially does. And it may even go further and just acquire Canonical and start chasing its own Linux business. (Seems unlikely, considering how RHEL has a lot more certifications for enterprise applications and Ubuntu is aimed at new, cloud-native applications.)

There are also some interesting possibilities when it comes to integrating IBM i into the application lifecycle management software that HPE has been peddling for many years and that will be woven into the Micro Focus stack at some point, presumably. The automation tools, which have a long heritage in X86 systems, could also be extended to the Power platform, including AIX and IBM i. NetIQ has its roots in the IBM i market, so the hooks are already there.

The funny bit about this deal is that the HPE software business is about twice the size of the Micro Focus business, and yet Micro Focus shareholders, which include a slew of private equity firms, some of whom owned stakes in Attachmate and Micro Focus individually and who were rumored to be interested in buying the HPE software business outright. Take a look:

Revenues for both Micro Focus and HPE Software have been in slight decline for years, which makes sense for businesses that are dominated by legacy products. Funny thing is that Micro Focus profits have been on the rise, and the HPE software biz can be tweaked so it can grow profits, too. The odd thing is that HPE CEO Meg Whitman said as much, which begs the question as to why HPE didn’t keep its software business and tweak it itself, or even go one better and buy Micro Focus itself. Perhaps after the $10.2 billion debacle that was the Autonomy acquisition and having shelled out billions and billions more for software that HPE is essentially giving away, it has had its fill of the software business.

This has the potential to make Micro Focus stronger, and inasmuch as some IBM i shops use Micro Focus products for application modernization or security, this is good news. It will be interesting to see what, if anything, Micro Focus does to extend its IBM i footprint in the wake of the HPE software deal. All we know is that Micro Focus said that the deal was consistent with its strategy of “acquiring and efficiently managing sticky mature software assets.”

That sure sounds like IBM i. Maybe Micro Focus will take a run at HelpSystems now.

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