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Micro Focus snaps up Serena

The enterprise software giant has struck a $540m deal to acquire a US peer.
March 22, 2016

Micro Focus (MCRO) has agreed to acquire Serena Software for $540m (£378m), in line with its strategy of buying and improving mature software businesses. The enterprise software titan will finance the purchase through a £150m placing and $325m in debt, and expects it to boost EPS in the next financial year.

IC TIP: Buy at 1477p

Like Micro Focus, Serena specialises in helping companies to modernise and maintain their legacy computers. Underlying sales fell about 3 per cent in the year to January 2016, but adjusted cash profits of $87m represent a margin of about 50 per cent. Moreover, close to three-quarters of its revenues are recurring and it has a large and diversified customer base.

A key concern will be the deal's impact on cash returns to investors. Management suspended 'returns of value' following the acquisition of Attachmate, saying it would consider reinstating them once net debt falls below 2.5 times adjusted cash profits. Analysts at Numis expect net debt to be 2.6 times cash profits after the Serena deal closes in May, meaning the wait for cash returns shouldn't be significantly extended.

Broker Panmure Gordon hiked its EPS forecast by 13 per cent to 177¢ for the year to April 2017, up from 146¢ this financial year (97.1¢ in FY2015).