HPE Spins Software Business to Micro Focus for $8.8B

Hewlett Packard Enterprise has struck an $8.8 billion deal to spin off its enterprise software business and merge it with UK IT specialist Micro Focus, leaving HPE with a core business focused on hardware, software and services for "hybrid IT" (multi-cloud, edge, software-defined infrastructure and the traditional data center).

The transaction includes a $2.5 billion cash payment to Hewlett Packard Enterprise , whose shareholders will own 50.1% of the resulting company. (See HPE Spins Off Software to Micro Focus.)

The combined company will be one of the largest pure-play enterprise software companies in the world, HPE said in a statement. It will include much of the technology acquired by HPE as part of its disastrous $10.2 billion takeover of British software firm Autonomy. (See HP Claims Fraud by Autonomy Team and HP Gets Autonomy.)

The "spin-merge" leaves the remaining HPE with about $28 billion in annual revenues, between 50,000 and 60,000 staff, and in a better position to pursue opportunities in "hybrid IT," CEO Meg Whitman said on the company's quarterly earnings call Wednesday, soon after announcing the deal.

Hybrid IT includes the traditional data center, which accounts for 85% of IT spending today. It also includes software-defined infrastructure, cloud, compute, storage and networking at the edge of the network, Whitman said.

The Micro Focus deal is part of an ongoing strategy to both divest of its non-core business and make acquisitions to improve focus on its core, Whitman said.

"Maybe back in the day it was great to be a technology supermarket, like the financial supermarkets of yesterday," Whitman said. But the next four or five years, she believes, will be about speed, agility, focus and innovation.

Before HPE split from HP Inc. (NYSE: HPQ) late last year, HP was the epitome of the technology supermarket, selling everything from service provider networking and enterprise data center servers to printers and toner cartridges. (See Hewlett Packard Enterprise Is Born.)

Despite the Micro Focus deal, HPE will continue to be in the software business, but focused on systems software rather than services software, Whitman said. Likewise, it plans to use its 22,000 services staff to help customers transform their businesses to take advantage of new technology.

In late May, HPE spun off a computer services business employing about 100,000 people, or two thirds of the company's staff, and merged it with Computer Sciences Corp.

HPE plans to continue to pursue acquisitions as well, where it fits that hybrid IT focus. SGI and Aruba are examples of those kinds of acquisitions, Whitman said.

HP acquired Aruba, a provider of WiFi access equipment, for $3 billion last year, to build a stake in edge computing. It paid $275 million for SGI earlier this month, to beef up its high-performance computing portfolio. (See HP Sets Sail for Aruba.)

What's going over to Micro Focus? That's HPE's Application Delivery Management, Big Data, Enterprise Security, Information Management & Governance and IT Operations Management businesses, which generated revenues in the 12 months to 30 April, 2016, of $3.2 billion. The combined business will have annual revenues of $4.5 billion, and will be headed by Kevin Loosemore, Micro Focus executive chairman, and CFO Mike Phillips. HPE expects the deal to close by the second half of 2017.

In addition to the spin-off/merger, HPE and Micro Focus announced a commercial partnership naming SUSE, the division of Micro Focus dedicated to open source software development, as HPE's preferred Linux partner, combining HPE's Helion OpenStack and Stackato with SUSE OpenStack expertise for enterprise hybrid cloud, HPE said.

On its earnings call Wednesday, HPE announced revenue for the third quarter 2016 ending July 31 of $12.2 billion, down 1% year over year when adjusted for divestitures and currency. Earnings per share were $0.49, beating the outlook.

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Since it split from HP Inc. (NYSE: HPQ) late last year, HPE has been busy with mergers and acquisitions. It did a $2.3 billion Chinese deal in May to sell a 51% stake in its H3C venture that sells networking, server, storage, hardware and related services.

Once the latest transactions close next year, HPE's headcount will go from about 210,000 to between 50,000 and 60,000.

The HPE deal with Micro Focus comes on the same day that Dell completed its acquisition of EMC, which includes a controlling stake in VMware Inc. (NYSE: VMW). (See Dell-EMC deal closes next week.)

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— Mitch Wagner, , Editor, Light Reading Enterprise Cloud