Micro Focus – Deja vu?

(By Philip Carnelley – Thursday, 7th May 2009 9:30am). Now the dust is settling on Micro Focus' buying spree yesterday (see Busy day for Micro Focus) we have to say that we're surprised by the exuberance shown by the markets. Indeed, Micro Focus shares rose 18% yesterday (44% YTD) and are up another 4% as we write.

For make no mistake, these deals are not a shoo-in. First, Borland is a company with troubles (Ed: we oldies can still remember the heady days when Philippe Kahn ran the business which competed head-on with Microsoft in the office software arena – and of course lost!). Borland lost $203m on revenue of just $170m last year, and that's an operating loss, not interest etc. However, it has $200m in the bank, which is some compensation when you're paying $75m to buy the company! Borland also has a very diverse offering which Micro Focus needs to winnow down without throwing the baby out with the bath water. The synergy here is less than fully obvious to us.

Second, Compuware - and we're grateful to UKHotViews reader Simon Atkinson, UK MD at Mark Logic, for pointing this out – a vast proportion of the testing software market is solidly owned by Mercury (HP), with the next and much smaller tranche with Rational (IBM). Compuware and Borland have been 3rd and 4th in this respectively for a long time now. So not only does Micro Focus have the challenge of integrating not one but two business lines, but it has to boost the market position of those companies and cross-sell very hard.

We wish the best of luck to CEO, Steve Kelly in his quest to make Micro Focus a major (and British owned!) force to be reckoned with in software development. We'd love to see that. But let's be clear: he has major challenges ahead. This could turn out to be yet another example of a UK company making a bad USA acquisition. Those of us with long memories can give examples too numerous and painful to recount from over the years - including Micro Focus' own merger with Intersolv (itself the result of a merger of doubtful wisdom) to form Merant. It took Micro Focus years to recover from that move, but all credit to the company for turning things around. Let’s hope this will not be another case of ‘deja vu’!