It has certainly been a promising day for shareholders in software company Micro Focus (LSE: MCRO). Micro Focus shares moved up over 90% in early trading today. That sort of increase does not happen for no reason. In this case, it is the announcement of a takeover bid.
Sometimes a bid highlights some existing value that has been overlooked in a business. So, should I still add Micro Focus to my portfolio – or have I missed the boat?
Troubled history
The first thing worth noting is that despite today’s surge in Micro Focus shares, the longer-term picture is less rosy.
Even including the latest increase, over the past year the shares have risen just 18%. That means that, before the bid, they were lagging badly on a 12-month basis. Looking at the past five years, the shares have lost three-quarters of their value. Seen from yesterday, today’s share price looks great. 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.
Micro Focus bid
In fact, I think that helps explain why the bidder has offered such a high price premium. 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.
A takeover bid premium is common, as it helps persuade shareholders to part with their stock. But a 98% premium is unusually high. 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 bidder presumably hopes shareholders will see the offer as generous and therefore accept it.
Deal or no deal
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.
It is possible that a third-party bidder could emerge, which might push the price up further. 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. I would not buy shares simply in the hope of a higher offer, as that is trading not investment.
Instead, I would consider the fundamentals of the investment case for Micro Focus shares from first principles.
My move on Micro Focus shares
I had already been eyeing Micro Focus shares in the past year. Even now, after today’s price jump, they have a yield of over 4%. If I had bought yesterday I would be in line for an 8% yield and perhaps now a large takeover premium to boot.
What concerned me about Micro Focus as a candidate for my portfolio was the business performance. Revenues fell at the interim stage and net debt stood at $3.7bn. The takeover could help resolve the company’s debt problem and I therefore see a logic for it. But I chose not to invest in Micro Focus a few months ago based on the business fundamentals. Doing so now the Micro Focus shares have jumped dramatically would be illogical for me.