HPE Spins Its Non-Core Software Assets For $8.8 Billion Into Merger With Micro Focus International Plc .

Hewlett Packard Enterprise (NYSE:HPE) announced plans on Wednesday for a spin-off and merger of its non-core software assets into Britain’s Micro Focus International Plc (MCRO.L). Earlier in the month, Reuters reported that the company had been in talks with the private equity firm Thoma Bravo to sell the software unit for between $8 billion and $10 billion. As things now stand, this spinoff and merger is to unlock value worth $8.5 billion for its shareholders. ^[1]

HPE plans to contribute the following software assets to the transaction: Application Delivery Management, Big Data, Enterprise Security, Information Management & Governance and IT Operations Management. Notably, many of these these assets were acquired by pre-spit Hewlett-Packard through the controversial acquisition of Autonomy in 2011. The company will continue to have a sizable software business, both through its interest in Micro Focus and through its focus on software-defined infrastructure, the so-called hybrid IT increasingly adopted in today’s data centers.

This spin-off and merger is likely the culmination of a series of trasnactions since the split with HP.  The deal comes three months after the announcement that it was spinning off its enterprise services segment into a separate entity, which would then be merged with CSC to form a business with $26 billion in annual revenues. ^[2] And it follows by less than a month the announcement of HPE’s acquisition of the High Performance Computing vendor Silicon Graphics, which has revenues of about $550 million. This transaction firmed the very high end of its server offering. With this latest software deal, the company has nearly completed the realignment of its portfolio with its go-forward strategy, which focuses on the fast growing, high margin hybrid IT that is delivered through software-defined infrastructure. In this note, we explore the disinvestments and HPE’s go-forward strategy.

Please refer to our full analysis for Hewlett Packard Enterprise

The Spin-off and Merger Of These Non-Core Software Assets Increases Focus On Software Defined Technology

HPE is structuring the deal effectively as a Reverse Morris Trust, a transaction that combines a divisive reorganization (spin-off) with an acquisitive reorganization (statutory merger) to allow a tax-free transfer (in the guise of a merger) of a subsidiary under United States law, to Britain’s Micro Focus International Plc, which has a market capitalization of close to $6 billion. Under the terms of the deal, HPE’s shareholders will receive a cash payment of $2.5 billion, while retaining a 50.1% ownership of a newly-formed company, a stake valued at $6.3 billion. The newly formed entity is expected to be world’s largest pure-play enterprise infrastructure software company The combination of HPE’s software assets with Micro Focus is expected to create a business with annual revenues of approximately $4.5 billion. Additionally, HPE expects to incur one-time after-tax separation costs of approximately $700 million, most of which will be accrued in 2017.

However, this deal will enable the company to focus on critical software assets that are aligned to its strategy to roll out world class services for its software defined hybrid infrastructure services. In fact, the company has reiterated that it will “double down on the software capabilities that power and differentiate infrastructure solutions and are critical in a cloud environment.”

Improves Focus On Core Areas Of Business

The management believes that HPE will be able to sharpen its focus on the next generation Software Defined Infrastructure that leverages the breadth of its portfolio, including its servers, storage, networking, and converged infrastructure, as well as its Helion cloud platform and core software assets like HPE OneView.

Currently, HPE generates over $28 billion in revenues from its server, storage, networking and technology services business.  However, with the divestment of non-core businesses, HPE can improve not only improve its margins but also emerge as an industry leader in delivering secure hybrid IT solutions.

We believe that through these transactions, the company will be able to stabilize its revenue for server division, which is facing stiff completion from white box manufacturers, by focusing on differentiated solutions and offering an integrated, and converged  infrastructure solutions. We expect that HPE’s server revenue will stabilize at $13.7 billion by the end of our forecast period in 2023.

Additionally, the technology service, which includes virtualization, cloud deployment and security, is expected to grow in the future as the company realigns and invests in cloud services for this division. We expect that the technology services revenue would grow to at least $8.1 billion by 2023 as it rejigs its business.

We currently have a $20.55 stock price estimate for HPE, and are in the process of updating our model.

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1. CEO Meg Whitman on HPE’s Plans to Spin-Off & Merge Non-Core Software Assets With Micro Focus, September 7 2016 [↩]
2. Read more about it here [↩]