The takeover could help resolve the company’s debt problem and I therefore see a logic for it. Revenues fell at the interim stage and net debt stood at $3.7bn. What concerned me about Micro Focus as a candidate for my portfolio was the business performance. If I had bought yesterday I would be in line for an 8% yield and perhaps now a large takeover premium to boot. Even now, after today’s price jump, they have a yield of over 4%.
I had already been eyeing Micro Focus shares in the past year. Instead, I would consider the fundamentals of the investment case for Micro Focus shares from first principles. I would not buy shares simply in the hope of a higher offer, as that is trading not investment. Then again, at the time of writing, Micro Focus shares are actually trading at a slight discount to the offer price of £5.32 a share. It is possible that a third-party bidder could emerge, which might push the price up further. I think there is a fair chance the deal will go through given the terms of the offer, which Micro Focus’ board of directors is recommending. The bidder presumably hopes shareholders will see the offer as generous and therefore accept it. I think it is an acknowledgment of the fact that Micro Focus shares have been on a long, slow decline in worth over the course of many years. The premium of around 98% to yesterday’s closing price means that Canadian bidder Open Text is offering to pay almost double the share price of 24 hours ago.Ī takeover bid premium is common, as it helps persuade shareholders to part with their stock. In fact, I think that helps explain why the bidder has offered such a high price premium. But seen from the perspective of a long-term shareholder, even the bid premium cannot disguise how value-destroying it has been to own Micro Focus shares. Seen from yesterday, today’s share price looks great. Looking at the past five years, the shares have lost three-quarters of their value. That means that, before the bid, they were lagging badly on a 12-month basis. Even including the latest increase, over the past year the shares have risen just 18%.
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