Open Text makes rare divestiture, selling off recently acquired mainframe business for US$2-billion-plus

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Serial technology company acquirer Open Text Corp. OTEX-T has made a rare divestiture, selling off a mainframe-computer business it acquired earlier this year in its US$5.8-billion purchase of British technology stalwart Micro Focus International PLC.

The Waterloo, Ont., information management software company said Tuesday it would sell Micro Focus’s application modernization and connectivity unit for US$2.275-billion in cash before taxes and fees to Rocket Software Inc., which is owned by private equity giant Bain Capital. The deal value amounts to 4.6 times the unit’s 2023 revenue and 8.3 times its adjusted operating earnings – roughly in line with the valuation of Open Text’s stock.

Open Text said it would use the proceeds to improve its financial position and focus on its cloud and artificial intelligence businesses. “This divestiture will better position us to move with more speed in higher organic growth areas such as cloud capabilities and AI, strengthens our balance sheet to achieve our deleveraging targets ahead of schedule and returns the company to capital flexibility,” Open Text chief executive and chief technology officer Mark Barrenechea said in a statement.

The 750-employee unit being sold is not increasing revenue but is highly profitable, with an operating profit margin of 55 per cent of revenue, compared with the high 30s for Open Text overall. Mr. Barrenechea said the mainframe business was seen as a non-core part of its overall business, which has a longer-term goal to increase revenue from existing operations by 2 per cent to 4 per cent annually.

On a conference call with analysts, Mr. Barrenechea said the company had not intended to sell the mainframe business but decided to pursue a deal after receiving an inbound inquiry from Bain. He said Open Text is not looking to divest any other parts of Micro Focus.

Open Text said the deal, expected to bring in US$2-billion in net proceeds, wouldn’t affect its 2024 financial targets, and that it anticipated the deal would close in its fiscal fourth quarter ending next June 30. With the debt paydown from the proceeds, Open Text will cut its annual interest costs to about US$400-million from about US$550-million

The company did trim its revenue, adjusted margin and free cash flow estimates for its fiscal year starting July 1, 2025, while anticipating it would increase its share of free cash flow earmarked for dividends and share buybacks to historic levels of 30 per cent from its previously forecast 20 per cent after the Micro Focus deal. Open Text is now aiming to generate revenues of between US$5.7-billion and US$5.9-billion in its 2026 fiscal year, earn an adjusted operating profit margin of 36 per cent to 38 per cent, and produce free cash flows of US$1.2-billion to US$1.3-billion.

Goldman Sachs advised Open Text, with Cleary Gottlieb Steen & Hamilton LLP providing legal advice. Waltham, Mass.-based Rocket was advised by RBC Capital Markets, Barclays Capital, Deutsche Bank Securities and UBS Securities. Those banks and several others are providing the debt financing for the deal.