HPE non-core software and Micro Focus combine – the matrix reloaded

It’s a busy time for merger and acquisition activities in our industry. On the same day the Dell/EMC merger took place last week HPE announced its financial results and the offloading of its non-core Enterprise software into Micro Focus for a deal worth $8.8b. It’s not wonderful news for the UK IT industry because although Micro Focus will continue to be quoted on the London Stock Exchange, HPE’s shareholders will take a 50.1% (just) controlling stake. It’s a dilution of Micro Focus’s nationality, but not as stark as (Japanese) Softbank’s acquisition of ARM Holdings.

Micro Focus has been a company built from acquisition of (important, but sometimes slightly ageing) brands, but could become develop into a strong new Enterprise ecosystem akin to VMware if managed carefully. Like many of the most recent organisational announcements this is part of the changing landscape of our industry from horizontal to matrix integration, of which I’ll explain later.
The Figure above shows the relative positions of the 2 suppliers’ software and associated services businesses. Who is Micro Focus? I’m sure many of you know them very well: if not, here’s my precis:

• Based in Newbury, Berkshire, UK (like Vodafone, just round the corner from ITCandor’s offices)
• Founded – concentrated on COBOL software products
• Bought by Intersolv for $534m to create Merant – 1998
• Demerged from Merant to become Micro Focus – 2001
• Bought Israeli NetManage for $73.3m – 2008
• Acquired Borland (application life cycle management tools) and Quality Solutions (part of Compuware) – 2009
• Sued the NSW Police Force for exceeding its user licencing – settled out of court – 2010
• Acquired Orbix, Orbacus and Artix products from Progress Software – 2013
• Acquired Attachmate (Attachmate, NetIQ, Novell, SUSE products) for $1.2b – 2014
• Acquired Serena for $540m – March 2016
• HPE proposes to offload its ‘non-core’ software assets (application delivery management, big data, enterprise security, information management and governance, and IT operations management) in an $8.8b deal to create a new company of which it will have a 50.1% stake– Sept 2016

Software markets tend to be dynamic with high profitability, relatively small workforces and strong growth rates. The downside is that their revenues pall in comparison to hardware, telecom and IT service areas, despite the successful vendors boxing substantially above their weights. My Figure shows splits for the software and services revenues from the combining companies; HPE will be retaining far more money as part of this deal than it will be offloading; it’s important to note that the revenue of services associated with an Enterprise software franchise is often larger than those for the software itself.

How does Matrix Integration fit in? The move from vertical to horizontal integration happened decades ago, accelerated by anti-trust cases against IBM which forced us all to start sub-dividing the IT market into hardware, software and services; however horizontal integration itself (where vendors competed with each other to be top in components, outsourcing, servers, smart phones…. you name it) is a restriction for the largest suppliers who want to play major roles in multiple layers.

How do you succeed overall when the business models of the disaggregated sub-markets are very different? One ‘pre-matrix’ approach is to offload those divisions which are most different – Dell and HPE jettisoning (what had been) Perot and EDS respectively are examples. To use a boating analogy it’s as if Enterprise outsourcing companies are oil tankers and you don’t want those if you’ve decided to own a cruise fleet.

What makes the HPE/Micro Focus deal part of matrix integration is the controlling interest kept by HPE. Similarly Dell Enterprises is keeping VMware, Pivotal, RSA and SecureWorks as associated brands – partially or fully-owned, but let free as semi-independent vendors to build and farm their own ecosystems within their chosen sub-market layer. It’s interesting that VMware signed another important agreement with IBM just before the Dell/EMC deal was formalised – it’s highly unlikely that Dell Technologies (or any of the largest vendors) would partner with strong competitors in their core businesses.

To continue the boating analogy, Enterprise software suppliers are like speed boats and don’t want to be permanently tied up to their cruiser. The new Micro Focus will no longer be British, but its creation is right on theme with the most modern organisation realignments of the industry…. Oh and I don’t think that this is going to be a disaster for HPE as I did when it bought Autonomy!