HPE Accelerates Strategy With Spin-Off and Merger of ‘Non-Core’ Software Assets With Micro Focus

Hewlett Packard Enterprise today announced plans for a spin-off and merger of its non-core software assets with Micro Focus in a transaction valued at roughly $8.8 billion.

The software assets include HPE’s Application Delivery Management, Big Data, Enterprise Security, Information Management & Governance and IT Operations Management businesses. According to the vendors, added to Micro Focus’ complementary portfolio, the combined assets will create one of the world’s largest pure-play software companies.

In a letter on the HPE website, HPE CEO Meg Whitman noted that when HPE was launched as a standalone company, it laid out its strategy as a provider of hybrid IT, built on next-generation, software-defined infrastructure that will run customers' data centers and help them make the transition to multi-cloud environments. To achieve this, she said, HPE has been realigning its portfolio and product roadmap with a go-forward strategy. "And today we announced plans for the spin-merge of our non-core software assets with Micro Focus," Whitman said. "The combination of HPE’s Application Delivery Management, Big Data, Enterprise Security, Information Management & Governance and IT Operations Management businesses with Micro Focus will create one of the world’s largest pure-play software companies."

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.  This equity stake in Micro Focus is valued at approximately $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 approximately $8.8 billion. The transaction is expected to be tax-free to HPE.   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.

At the same time, HPE says, the move will enable it to realize its own vision as a provider of hybrid IT, built on a software-defined infrastructure to run customers’ data centers and help them bridge to multi-cloud environments in the future, while also supporting the emerging intelligent edge that it expects to power campus, branch and IoT applications for decades to come. 

In addition, HPE and Micro Focus announced plans for a commercial partnership that will name SUSE as HPE’s preferred Linux partner and will bring together HPE’s Helion OpenStack and Stackato solutions with SUSE’s OpenStack expertise to provide enterprise-grade hybrid cloud offerings for HPE customers.

With approximately $28 billion in annual revenue, HPE says it will have significant scale, a diversified, world-class portfolio and a global footprint to meet the evolving needs of its customers and partners.

The company will deliver hybrid IT solutions, leveraging its portfolio of software-defined servers, storage, networking and converged infrastructure. HPE’s newly created Software-Defined and Cloud business will build upon software assets such as HPE OneView and the Helion Cloud platform to deliver software-defined Hybrid IT solutions such as Synergy – HPE’s composable infrastructure offering that enables customers to operate their workloads.

HPE will also support IT at the edge with campus, mobility and IoT offerings. Wrapped around this portfolio is HPE’s Technology Services capability that helps customers take advantage of opportunities in emerging areas like campus, branch and industrial IoT programs. Technology Services comprises about 22,000 service professionals and will represent approximately 25 percent of the company’s revenue after the spin-off of its Enterprise Services business and non-core software assets.

“Services and Software remain key enablers of HPE’s go-forward strategy,” said Meg Whitman, CEO of HPE. “HPE will double down on the software capabilities that power and differentiate our infrastructure solutions and are critical in a cloud environment.”

The combination of HPE’s software assets with Micro Focus is expected to create a business with annual revenue of approximately $4.5 billion, spanning IT operations, security, information management, big data analytics, cloud, open source and development. In addition, the company will have a go-to-market capability with nearly 4,000 salespeople worldwide, as well as R&D resources.

Micro Focus says it expects to improve the margin on HPE’s software assets by approximately 20 percentage points by the end of the third full financial year following the closing of the transaction, while also investing in key growth areas like big data and security. As owners of 50.1% of the combined company, HPE shareholders will share in the value of these operational improvements, as well as future growth of earnings. 

The combined company will be led by Kevin Loosemore, executive chairman of Micro Focus, and Mike Phillips will serve as chief financial officer.

“The time is right for consolidation in the infrastructure software market and this proposed merger will create one of the leading players in this space,” said Loosemore. “The combined organization will benefit from strong positions in a number of key segments, further enhancing our customers’ ability to leverage both prior and new IT investments to exploit the latest industry innovations such as mobility, cloud, the Internet of Things, Big Data and Analytics. The transaction reinforces Micro Focus' established acquisition strategy and our focus on long term customer value through the disciplined and efficient management of mature infrastructure software products.”

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