Open Text Corp. OTEX-T shares fell by more than 13 per cent as analysts warned that its new US$2.1-billion plan to buy the British software company Micro Focus International PLC could weigh on its future performance.
The offer of £5.32 ($8.14) a share for Micro Focus is a 99-per-cent premium over the company’s Thursday closing price on the London Stock Exchange. The deal was announced late Thursday and will total US$6-billion, including debt when it closes, which is expected early next year.
But shares of Open Text, a Waterloo, Ont., business software conglomerate, sank when markets opened Friday as investors and analysts reacted to Micro Focus’s declining revenue, sending Open Text’s stock price to 2018 levels. It closed at $41.54 on the Toronto Stock Exchange and US$31.89 on the Nasdaq on Friday.
Both companies offer business-to-business software increasingly delivered through the cloud, though their customer base has little overlap. Open Text chief executive officer Mark Barrenechea said in a Thursday conference call that his company could help Micro Focus’s business lines return to growth, though his comments were met with some skepticism.
“At first look we are apprehensive about the fact that MCRO has been a declining business – and believe that this might weigh on OTEX’s multiple in the near-term,” Bank of Montreal Capital Markets analyst Thanos Moschopoulos said in a research note Friday. He lowered his price target to US$43 from US$46 at the same time, warning of caution “until the deal closes and OTEX can start to demonstrate successful execution on cost/revenue synergies.”
Stephanie Price at Canadian Imperial Bank of Commerce reduced her target price to US$44 from US$51, calling the Micro Focus acquisition “a multiyear turnaround story” and adding that, “We see upside if Open Text is able to turn the Micro Focus business around faster than expected.”
At Royal Bank of Canada Capital Markets, analyst Paul Treiber was more upbeat, maintaining an “outperform” rating and highlighting Open Text’s long history of growth through acquisitions: “If Open Text successfully integrates Micro Focus like previous acquisitions, we believe the acquisition will create meaningful shareholder value.” But the target company’s declining revenue, he warned, “may restrain” Open Text’s valuation.
In its announcement late Thursday, Open Text said it would fund the deal with US$4.6-billion in new debt, including a bridge loan and term loan, as well as US$600-million in existing debt and US$1.3-billion in cash.
The announcement was made as high inflation and rising interest rates have pushed down tech valuations after years of constant growth – making it a ripe season for acquisitions.
“This is the right company and right opportunity, with amazing products, strong talent, marquee customers and valuable intellectual property – and a business that can gain value in the Open Text software system,” Mr. Barrenechea told analysts on a conference call.
Micro Focus is based in Newbury and first formed in 1976. The data-management and analytics company merged with Hewlett Packard Enterprise Co.’s software business in 2017.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.