By Paul Sandle and Liana B. Baker
LONDON/NEW YORK (Reuters) - Hewlett-Packard Enterprise agreed to sell its software business to Micro Focus in a $8.8 billion deal that shrinks the Silicon Valley pioneer again while catapulting the little-known British firm into the top tier of European tech companies.
Autonomy, the British firm bought by HP in an ill-fated $11 billion push into software just five years ago, will return to British control after the deal for far below its original price.
HPE Chief Executive Meg Whitman is focusing the group on a few areas such as networking, storage and technology services since it separated last year from computer and printer maker HP Inc.
"Micro Focus' approach to managing both growing and mature software assets will ensure higher levels of investment in growth areas, like big data analytics and security, while maintaining a stable platform for ... software products that customers rely on," she said.
Micro Focus approached HPE in February, four months before Britain voted to leave the European Union in a shock referendum that initially spooked global financial markets, the British firm's executive chairman, Kevin Loosemore, said.
It is the second big deal involving a British company since the June 23 Brexit vote that many feared would put the brakes on mergers. It is also a relatively rare example of a British company buying U.S. technology assets.
Loosemore spotted another opportunity to profit from managing old software. Companies including banks and airlines pay Micro Focus to extend the life of the computers they use to run their businesses, for example to manage data. This allows the companies to avoid spending on newer computer systems.
"(It) is entirely consistent with our established acquisition strategy and our focus on efficient management of mature infrastructure products," he told reporters on a conference call from New York.
BORING BUT PROFITABLE
Shares in Micro Focus, based in Newbury, southern England, jumped by a fifth to an all-time high of 2,400 pence, topping the FTSE 100 index of leading shares that it joined days ago, after chip designer ARM Holdings was bought by Japan's Softbank Corp.
Micro Focus, with a market capitalization of 4.45 billion pounds ($6 billion) before the deal, has been snapping up software companies. This would be its largest deal to date. Earlier this year, it acquired U.S. firm Serena Software for $540 million.
Loosemore said he would bring the core earnings margin for the mature assets in the deal - about 80 percent of the total - from 21 percent today to Micro Focus's existing 46 percent level within three years.
"The way we do it is really just lots of 101, boring management," he said. "Too often people chase unattainable growth rates and in doing so they waste a lot of money."
A serial acquirer of software platforms, Micro Focus has also shifted strategy to buying higher growth software such as SUSE, the world's No.2 maker of Linux software while wringing the most out of aging software.
"This strategy works well for current shareholders, who gain significant ownership in better-run businesses," said UBS analyst Steve Milunovich, who tracks HP Enterprise.
The deal, announced along with HPE's latest quarterly earnings, came on the same day that Dell and EMC Corp completed their merger in a deal that unites two of HPE's biggest rivals.
In the third quarter, HPE reported net revenue of $12.2 billion, down 6 percent from $13.1 billion a year earlier. The transaction is expected to be tax free to HP.
The deal is the latest in a series of asset disposals by HPE, which agreed in May to spin off and merge its struggling technology services business to Computer Sciences Corp <CSC.N>, in a transaction valued around $8.5 billion.
The sale will mean two-thirds of HPE's remaining business will be hardware, which is fast becoming a commodity, UBS's Milunovich said. It could make the company a more agile competitor but also could make it harder to compete with far larger companies such as Cisco <CSCO.O> and Dell [DI.UL].
Micro Focus will pay $2.5 billion in cash to HPE. JP Morgan is advising on the deal and providing financing for the payment. HPE shareholders will own 50.1 percent of the combined company that will operate under the name Micro Focus and be run by its executives. HPE, which is working with Goldman Sachs [GSGSC.UL] on the deal, said it would pay $700 million in one-time costs related to the separation of the assets.
AUTONOMY BACK IN BRITAIN
In the deal, HPE is sending one of the British firms it acquired back to where it started.
HPE acquired part of its software portfolio through HP's $11 billion purchase of Autonomy in 2011, a deal that was supposed to form the central part of the U.S. group's move into software. HP later wrote off three-quarters of the company's value.
"Some of those [Autonomy] products are very exciting, some of them are more mature," Loosemore said.
Other HPE assets that will be merged include software for application delivery management, big data, enterprise security, information management & governance and IT Operations management businesses.
By acquiring the HP Enterprise software assets, the deal thrusts Micro Focus into the top ranks of European software makers. It would rank around sixth in market capitalization terms among regional software names.
Since sterling tumbled on the Brexit result, many British companies have become more attractive for international suitors.
Loosemore said, however, the Brexit vote didn't change the dynamic. "If you map our share price in dollars rather than pounds it's pretty consistent," he said. "So no real effect."
(Additional reporting by Sophie Sassard, Eric Auchard; Editing by Kate Holton, Guy Faulconbridge, Anna Willard)