What happened
Shares of Micro Focus International (MFGP +0.00%) charged sharply higher on Friday morning, surging as much as 96.8%. At the same time, shares of Open Text (OTEX +3.13%) slumped as much as 13.4%. As of 12:30 p.m. ET, Micro Focus stock was still up 94.2%, while Open Text was down 12.8%.
The catalyst that sent shares of the technology companies in opposite directions was an unsolicited takeover bid by Open Text for its rival.
So what
Open Text announced in a press release on Friday that it had reached an agreement to acquire Micro Focus, paying 532 pence (roughly $6.29) per share for its UK rival, in an all-cash deal valued at roughly $6 billion. The buyout price represents a premium of about 99% compared to Micro Focus's closing price on Thursday and implies an enterprise value of about $6 billion.
The deal will still require the approval of Micro Focus shareholders with at least 75% voting in person or by proxy and will require the approval at least 75% of the stockholders voting on the measure. The merger will also need to be cleared by UK antitrust and foreign investment regulatory authorities and undergo a review by the relevant court.
Now what
Micro Focus specializes in a wide variety of enterprise software offerings, including information technology (IT) management, communications, cyber security, and messaging. For its part, Open Text is one of the largest software developers in Canada, focusing on emails, intranets, and document management.
The companies expect to achieve roughly $400 million in cost savings, and expect "meaningful expansion of cloud revenues, adjusted EBITDA and cash flows in fiscal 2024." Perhaps as importantly, Open Text expects the deal will increase the combined companies' total addressable market (TAM) to $170 billion, resulting from significant cross-selling opportunities.
Given the decline in Open Text shares on the announcement, investors may feel the company is paying too much for its competitor.
Micro Focus stock has been consistently declining for years, with the stock down 47%, 84%, and 90% during the preceding 1- 3-, and 5-year periods, respectively, after an ill-advised merger with Hewlett Packard Enterprise's software division. The buyout merely gets the stock price back to where it was a year ago, which may be the best Micro Focus shareholders can hope for.
