Micro Focus Buys COBOL App Modernization Rival Acucorp

Published: May 8, 2007

by Timothy Prickett Morgan

British legacy application modernization software company Micro Focus announced last Friday that it had acquired its smaller American rival, Acucorp, for $40.7 million. By eating Acucorp, Micro Focus has been able to eliminate a rival, leaving former mainframe supplier Fujitsu as the sole large company supplying COBOL environments for Windows, Unix, and Linux platforms.

In its fiscal 2006 year ended in April 2006, Micro Focus had sales of $143.7 million, a decline of 5 percent from fiscal 2005. Investors in the company's stock, which is a public company whose shares trade on the London Stock Exchange, were not exactly happy with the performance, and the company brought in a new chief executive officer, Stephen Kelly, who ran another software company called Chordiant prior to his stint at Micro Focus. One of the first things that Kelly did was acquire an Italian software company called Hal Knowledge Systems, which had created a set of tools that can scan the code running on legacy systems and build up a profile of those applications, by language, to show IT managers exactly what they have running in their data centers and how it all plugs together.

Because of some of the changes that Kelly put in place, reinvigorated partnerships with IBM and Microsoft, and the Hal Knowledge Systems acquisition, Micro Focus has rebounded a bit. Last week, in addition to the Acucorp acquisition, the company announced that preliminary sales results for fiscal 2007 would be on the order of $170 million, including results from Hal; that's an 8 percent revenue increase. More significantly, pretax earnings (not including depreciation charges or stock-based compensation) are projected to grow by 68 percent to around $65 million in fiscal 2007. Basically, the increase in profits is paying for two-thirds of the Acucorp acquisition.

Micro Focus was founded in 1973, and has over 15,000 companies using its legacy COBOL application development and modernization tools and over 1 million licensed users on the applications based on those tools; the company currently has 425 employees.

While no one likes to admit it, there are an awful lot of Unix and Windows servers out there in the world that are running COBOL applications that were ported off of mainframes a decade or more ago. Companies have invested a fortune in COBOL applications--IBM estimated cumulative COBOL application investments by mainframe shops to be $1 trillion back at the Y2K turnover--and they continue to use those COBOL applications and the skills of their programmers to create new applications or to morph legacy applications into something that looks more modern with a pretty face. According to estimates from prior Micro Focus financial reports, the worldwide application development tool market comprised about $13.2 billion in revenues in 2006, and the COBOL slice of that accounted for $1.95 billion, with about $620 million of that going just for mainframe or mainframe porting tools.

Acucorp was founded in 1988 by Pamela Coker, its president and chief executive officer, and Drake Coker, the company's chief scientist. The company says that its AcuBench tools and COBOL environment has been ported to over 600 combinations of operating system releases and server hardware, and over 4,000 customers have bought its tools and support over 1 million end user seats from the applications it has helped run on Unix, Windows, and now Linux servers. Acucorp may have a quarter of the customer base, but it appears to have as many end user seats as Micro Focus, which explains in large part why Micro Focus jumped on it.

Acucorp was notable in that it created the first portable COBOL85 compiler, and has done a lot of work integrating that ACUCOBOL-GT compiler with various database management systems. Acucorp is privately held, and has not released sales and profit figures.

In a statement announcing the deal, Micro Focus said that it would take an $8 million charge to restructure its business as it absorbed Acucorp. The company also said that Acucorp had an operating profit of $3 million in its fiscal year ended in December and had gross assets of $13.1 million. The company said further that Acucorp would boost Micro Focus' sales by approximately $17 million in fiscal 2008 ended in April 2008.

The company did not say what would happen to Acucorp's executives or staff employees, but it did offer the following statement to quell any fears among the Acucorp customer base:

"With the integration of Acucorp, Micro Focus will retain the strong elements of Acucorp and leverage Micro Focus' product and services capabilities to deliver products which customers expect and require. The combined strength of Acucorp and Micro Focus will serve Acucorp customers even better by leveraging investment in COBOL applications with products, development tools and services. Micro Focus remains committed to delivering the highest level of support and business value to Acucorp customers. Specifically for Acucorp customers, the combination of the two companies will bring further improvement in support and maintenance capabilities. The company believes the future will provide broader development capacity to accelerate innovation to meet customers' current and future demands."

Micro Focus expects to pay $40.7 million in cash and to adjust its working capital by no more than $250,000 to buy Acucorp. Micro Focus did not say when the deal would be completed, but it is expected to make a full report on its fiscal 2007 financial results on June 28, and will undoubtedly say a lot more then.

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