Information management giant OpenText (TSX:OTEX) stock rebounded strongly in November, and the tech stock has rallied by 37% so far this year. A US$5.8 billion acquisition that closed in January and management’s continuous modernization efforts paid off for OTEX investors. Interestingly, a divestiture announced in late November accelerates OpenText’s achievement of key investor-friendly objectives.
The $14.8 billion company’s rebranding from an old slow-growth technology vendor to a potentially vibrant, artificial intelligence (AI) enhanced, and cloud computing savvy information management firm lifted OTEX stock in 2023. Management is busy integrating a recently acquired Micro Focus into the fold. And suddenly, the company is selling off a recently acquired business segment before full integration.
That’s still good.
OpenText spins off a cash cow for profit months after acquisition
The biggest and latest highlight on OpenText stock in December 2023 is the company’s recently announced disposal of a recently acquired business. The company announced on November 28 the sale of its Application Modernization and Connectivity (AMC) business to a privately held Rocket Software for US$2.3 billion (CA$3.1 billion).
The AMC business was previously a part of Micro Focus — a business OpenText acquired in January 2023 for US$5.8 billion — a 99% premium to the target’s most recent closing price before the deal was announced in August 2022.
OpenText acquired Micro Focus for 2.3 times its trailing 12-month (TTM) revenue and 6.7 times its TTM adjusted earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) in January 2023. Less than a year later, the company is selling a profitable part of Micro Focus’s business at 4.6 times its revenue — twice the price multiple paid 11 months ago.
OpenText has grown through accretive acquisitions, it has closed more than 80 of them. However, the latest spin-off deal is unique. It makes Open Text an astute, value-oriented, and profitable stock trader. Interestingly, OpenText’s chief executive officer clarified that selling the AMC business wasn’t the original plan. The buyer solicited the transaction.
It’s still possible that OpenText devised a plan to buy a slowly growing Micro Focus for its potentially higher value as a restructured asset and as a split company. Given the benefit of hindsight, I could say that the value paid for Micro Focus was potentially lower than the sum of its parts, and OpenText pounced on a profitable opportunity.
Is OpenText stock still a buy?
OpenText’s sale of AMC business disposes of a profitable but no-growth, main-frame-focused, off-cloud business that serves legacy customers, most of whom run an old (1950s) COBOL programming language that could potentially face a natural death over the next decade or two. The company’s focus on AI and cloud-first growth opportunities is clearer, and the upcoming disposal accelerates its debt-reduction plans.
The deal reduces OpenText’s floating-rate debt, reduces leverage and enhances its balance sheet strength. It empowers the company to make new accretive acquisitions or repurchase its stock.
The company is a slow, steady, and profitable AI growth stock that could progressively reward long-term-oriented investors. OpenText sees a 15% growth in enterprise bookings over the next three years. Its remaining business may continue to grow as more organizations up-lift to the cloud and embrace AI-enhanced data analytics and information security.
Most noteworthy, OpenText consistently generates positive free cash flow — the currency it uses to make strategic acquisitions that expand its total addressable market. The tech stock trades at a reasonable price of 12.7 times its next 12-month free cash flow, which compares favourably against a competitor’s average multiple of 30.2 in the software industry.
As a complimentary “gift,” investors in OpenText stock receive a US$0.25 per share quarterly dividend that yields 2.5% annually. The dividend is seemingly safe, as the Dividend Aristocrat targets paying out under 30% of free cash flow and has raised the dividend at a compound annual growth rate of 31% since 2013.
