The global software industry never seizes to deliver big takeover deals. This time, it’s Open Text (NASDAQ: OTEX), a Canadian enterprise software company with over $3bn in annual sales, buying Micro Focus (LON: MICRO), a rival based in the United Kingdom.

• Open Text has entered a definitive agreement to pay 532 pence for each share of Micro Focus, a whopping 98% premium to the British company’s share price preceding the announcement. The cash payment comes at £1.8bn ($2.1bn). Including Micro Focus’s net debt load plus other liabilities of roughly $3.9bn that Open Text will absorb, the deal’s enterprise value adds up to $6bn.

This deal represents a bold bet by Open Text, which has made a series of acquisitions to strengthen its software portfolio in recent years. Last December, it acquired Zix, a Dallas-based email encryption software company, for $860mn, and in 2019, paid $1.5bn to buy Carbonite, an American cloud backup provider.

Micro Focus represents Open Text’s biggest acquisition yet. In context, the $6bn enterprise value equaled nearly half of Open Text’s market value (of $12.8bn) when the deal was announced on Thursday. The company’s value has dropped over 30% since then and now stands at $8.6bn, implying investors are uneased about Open Text spending that much on an acquisition.

Open Text will fund the acquisition with $4.6bn in new debt, $600mn from an existing credit line, and the rest with cash on its balance sheet. It’ll use $2bn of the new debt to pay down Micro Focus’s debt load, which isn’t unexpected given the company’s relatively high debt-to-equity ratio.

• Micro Focus sells software that enterprises use to run their technology operations. Its product suite range from data privacy and security tools to robotic process automation (RPA) and data analytics. In 2021, the company posted $2.9bn in sales. However, it has struggled with lagging sales and significant losses under a high debt load in recent years, making Open Text’s offer a great redemption from its troubles.

• Just like Micro Focus, Open Text offers an array of software products to enterprises, including data backup/recovery, cyber threat detection, machine learning modeling, etc. The Canadian company reported a $102mn net profit on $3.5bn in revenue in its most recent fiscal year (ended June 30, 2022).

If all goes as planned, the acquisition will close in the first quarter of next year.

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