Micro Focus – A Real Mess and “Systems Not Fit For Purpose”

Yesterday Micro Focus (MCRO) announced its Annual Results and it makes for sad reading. The company specialises in selling legacy software products, which as an old IT hand I should understand. But I have not held the stock lately, even though it had a good run up in share price until the end of 2017 under Executive Chairman Kevin Loosemore. The company managed to pay high dividends from strong cash flow but revenue growth other than from acquisitions was generally negative. There is potential value in selling and supporting old software but the acquisition of HPE in 2017 including the Autonomy software appears to have been a major mistake – simply too big to digest it seems.

I quote from some of the announcement:

“The revenue performance in the period was impacted by a combination of volatile macro-economic conditions and changing buying behaviour leading to the delay of customer investment decisions, and inconsistent execution, which was further impacted by the greater than expected complexities arising from the integration of the Hewlett Packard Enterprise (HPE) Software business acquisition”; and:

“The HPE Software business acquisition presented the typical challenges associated with making a large and complex acquisition and significant additional complexities relating specifically to this being a “carve-out” of a division from a much larger parent.

To enable this “carve out “, HPE designed and initiated the build of new IT systems, new business processes and identified the key functions and people required to support a standalone organisation. The adoption of these purpose-built systems and business processes across the enlarged Group was one of the key benefits expected from the acquisition.

In reality, the systems were proven to be not fit for purpose, the business processes were overly complex, and the organisational design was highly fragmented.  This has continued to have a material impact to core business operations, execution levels and overall productivity”; and:

“Through multiple acquisitions, the business has inherited a mix of regional and product orientated Go-to-Market models. These differences have led to inconsistent approaches to customer engagement and the associated deployment of resources and when combined with the systems issues outlined above impacted overall levels of execution and predictability of performance. This led to reduced productivity and elevated levels of staff attrition”.

It rather emphasizes the importance of robust, reliable and high-quality IT systems in companies and one would have thought that a software company would not manage to make such a hash of things. Morale in the company must be quite low now.

However they have a new non-executive Chairman in Greg Lock who is an old IBM hand. His name seemed familiar and he was Chairman in a company called Surfcontrol when I held shares in it. I do not recall he made any mistakes while there and he has considerable experience of other directorships since.

He says in the announcement that “I am pleased to join Micro Focus as non-executive Chairman, well aware of the previous successes and the present challenges.  I am looking forward to rolling my sleeves up to help management execute the plan”. It sounds like he is going to take a “hands-on approach” to resolve some of the problems.

Existing investors in the company may wish to hold on to see how events pan out, but it looks a risky punt for any new investors. Existing investors will appreciate an increased dividend and the yield is now over 10%, but a Daily Telegraph writer suggested they should press the Delete button. The share price fell 22% yesterday.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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One thought on “Micro Focus – A Real Mess and “Systems Not Fit For Purpose””

  1. Complete lack of due diligence during the merger. Unlike any merger I have previously witnessed.

    The issues highlighted in your article were clear to many of us on the inside. Upon completing the merger it was clear that there was a large culture clash between the two side. Micro Focus management seemed to hate employees and processes from HPE. Murdoch openly mocked Hsu after Hsu’s departure. This was all further exasperated by a pervasively toxic management culture in Micro Focus.

    Make no mistake, Micro Focus is a terrible company. Investors and potential employees shoud give it a miss.

    Like

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