How HPE plans to spin out its software assets

HPE Software’s Chris Hsu, who will soon become CEO of Micro Focus, explains how HPE’s latest strategic shift will impact customers and the software industry.

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Katherine Noyes

After playing a key role in the 2015 bifurcation of Hewlett Packard into the consumer-focused HP Inc. and the enterprise-centric Hewlett Packard Enterprise (HPE), Chris Hsu is busy working on another big split. Hsu, currently HPE’s COO and GM of HPE Software, is preparing to spin out much of HPE’s software portfolio to Micro Focus in a deal announced last September. When the spin is completed, Hsu will also take over as CEO of Micro Focus, which will be a nearly $5 billion software company with a wide portfolio of assets in big data, security, IT operations and more.

hpe chris hsu

HPE Software’s Chris Hsu

In this installment of the IDG CEO Interview Series, Hsu spoke with Chief Content Officer John Gallant about why HPE is skinnying down its software assets, which products are staying and going, and what the deal means for current HPE customers. Hsu explains why HPE chose to ally with Micro Focus and he talks about what the future holds for the company he will begin leading later this year.

[ Related: Tech Titans Talk: The IDG Enterprise Interview Series ] Why is HPE spinning off so many software assets?

Chris Hsu: We took a hard look at our strategy several years ago. This was when we were HP and we were a $100-plus-billion company. We competed against every major technology competitor in the world, from ServiceNow in software to Huawei in networking to Lenovo in PCs and Canon in printers. The ability to manage a company of that size and scale, to put the right focus on the businesses and to react and proactively shape markets across that wide a landscape was challenging. There’s probably not one of those segments that’s not in some form of technology or business model disruption.

[ Related: HPE offloads software arm to Micro Focus in $8.8 billion 'spin-merge' ]

The first step was to separate HPI and HPE, which we did in November 2015. I led the separation and then Meg [Meg Whitman, CEO of HP] asked me to move over to HPE and run the separation for HPE, in what was essentially the precursor of my COO role. Once we became an independent company, HPE, then we started to focus on how we can win in the marketplace.

The first question we asked is: What is the core of our business, where do we have IP that we’re known for as HPE and that allows us to grow and be successful long term? Do we have the right assets that address that strategy? At the same time, we asked ‘would the assets we have be better off as a combined whole or would they thrive as independent pieces, potentially combined with other players, to drive scale’? Those were the questions we teed up and we spent a lot of time wrestling with our board.

In the end, we concluded that the core of Hewlett Packard Enterprise was the Enterprise Group and IP-based services that surround the Enterprise Group. What we were known for, at its core, was compute and, while the industry was shifting rapidly, there was an insatiable demand for compute -- whether that was compute in the cloud, on-prem, a virtual private cloud or whatever dimension of hybrid IT you spanned across. We simultaneously concluded that our enterprise services business would be better as a standalone company combined with another industry player to create global scale. That’s because of the disruption that was going on in the services businesses driven by core technology shifts, the Indian outsourcers, and by players like CSC that were transforming themselves and had a massive turnaround over a short period of time.

[ Related: HPE CIO tackles tough 'spin merge' with CSC ]

If we were able to construct a merger with CSC such that we created the second-largest player in the IP services space, it would have a chance to shape the industry as a pure play. They could invest capital in ways that we wouldn’t invest given that the core of our business was really the Enterprise Group and that’s where all our capital was going from an M&A perspective. [We could] partner [our services business] with a management team that had driven a remarkable turnaround in the services industry. We came up with that and we focused wholeheartedly on executing that. I ran the strategy process and the negotiation for the deal, and then structured the separation plan and ran the divestiture management office until I took over software.

[ Related: HPE to spin out its huge services business, merge it with CSC ]

Once we got the enterprise services transaction structure, the next step was to take the software assets and look for the right partner. We looked across industries; we looked across private equity and operating companies. Truth be told, we didn’t know a lot about Micro Focus. When we did our diligence, and got introduced to Kevin Loosemore [Executive Chairman of Micro Focus]. we were really impressed. They’re roughly $1.3 billion in annual revenue, we’re roughly $3.2 billion. When you put these two together you get a $4.5 billion pure-play software company, which makes us the sixth [largest] pure-play software company in the world. You have global scale with a partner that has a distinct model for operating software assets and you become really relevant amongst enterprise software companies. Can you help people understand what software is leaving and what’s staying at HPE?

Hsu: Basically, systems software is staying and application software is going into the “SpinCo.” I don’t love that description, but that’s what we’ve said externally. Let me click one level deeper. Any of our freestanding software assets where we have R&D, we develop a product and then we go to market and sell that as a standalone product, that is what makes up our software business unit. All that software is going into the new company. That includes our IT operations management, our application delivery management - which is the former Mercury [Interactive] business- our security business, where the anchor tenant is ArcSight. It also includes our big data business, our information management and governance business, and our hybrid cloud management assets. That is the bucket that is going over to Micro Focus.

What’s staying in Enterprise Group is the systems software. No. 1 is any of the software that’s integrated into hardware that just makes the hardware work; that enables you to run your data center, etc. Included in that bucket would be our OneView software, which is the management pane for infrastructure. The second piece is anything related to the Helion cloud stack. This is where it gets a little bit confusing. We spun our OpenStack development team and Stackato, which is the dev platform, out to SUSE, which essentially bought that. SUSE, which is a Micro Focus company, will provide Helion OpenStack, the base OpenStack, open Linux and developer platform software that it needs, then Ric Lewis [GM, HP Enterprise Servers Business] will take that software and build on top of it to run, automate, orchestrate your private cloud environment.

The last piece is in Aruba, which is essentially a software company. It’s software-defined networking. One of the core assets on top of this is Aruba ClearPass, which helps secure data at the edge. When the deal is done is there still an HPE Software Group? Is that a separate group still within HPE?

Hsu: Ric Lewis essentially has the software-defined data center. That’s the group in which we just completed the acquisition of SimpliVity. That group is focused on building the software-defined data center stack which includes the Helion OpenStack Private Cloud piece. Alain Andreoli, who runs our data center group, basically has all the other pieces, the hardware and then we have a services organization that has all the technology, IP-based services and support.

[ Related: HPE buying SimpliVity for $650 million to boost hyperconvergence ] What does all this mean for HPE software acquisitions in the future? What would be emphasized? I was going to ask whether the SimpliVity deal was viewed as a software acquisition more than a hardware deal given where their real intellectual property lies.

Hsu: The SimpliVity deal is indicative of what Enterprise Group -- or HPE RemainCo -- will do. The beautiful thing about SimpliVity, which is one of the leaders in hyperconverged, is that it’s a software-defined infrastructure play that allows you to scale storage not just in one location but across multiple locations. We believe that it’s the most scalable hyperconverged asset out there, even relative to our own offerings. I think that’s a pretty good indicator because it’s a great example of where infrastructure and software are integral. Talk about how HPE and Micro Focus will work together in the future in terms of everything from deciding on development priorities. If I’m an HPE customer, how do I interact with Micro Focus for my existing products as well as any new ones? Tell us how these two companies are going to be working together.

Hsu: We’ve been discussing how we do this separation and merger in a way that builds a long-lasting partnership. I think there are a couple dimensions to this partnership. One is technology integration that you hit on, an OEM type relationship. Think about what we’re doing in our hybrid cloud strategy in software: We have an anchor asset called CloudSystem automation, which allows us to basically provision, orchestrate, automate workloads regardless of what the deployment platform is, whether it’s AWS or Azure or a private cloud, etc. That software is core to the Helion OpenStack stack.

We have a commercial arrangement for three years post-transaction whereby we OEM that software, which essentially means that any updates we make to the software go into the Helion OpenStack cloud. They also get the base source code and they can develop what they want to deliver for their customers in a private cloud environment. The key to that is they then can’t go out and compete with us directly in the marketplace as pure play software. It has to be sold as part of an OpenStack private cloud deployment. That’s one example. Another one is the SUSE example I just gave you where SUSE is going to do the base OpenStack and open Linux for Enterprise Group both as private cloud and other parts of the server business.

The other key point is we’re building an alliance organization inside of software to call on our Enterprise Group colleagues as one of our biggest channel partners. We’ll do roughly $80-$100 million of revenue through the Enterprise Group. A great example of that is in our Data Protector business, which is highly connected to storage. A large portion of our Data Protector software business goes in an attached sale through Enterprise Group. We’re going to treat them like a strong alliance partner.

Maybe the last thing I’ll say from a structure and governance standpoint, if you have one share the day before the transaction in HPE you’ll have a share in HPE RemainCo and a share in Micro Focus the day after the transaction. We’re putting all our shareholders into this new company and they will own 50.1 percent of the combined new company. Our board will be made up 50/50 of independent directors nominated by Micro Focus and 50 percent dominated by us and one of our EG members will also then sit on the board. We’re setting this company up to have a strong connection long term. I’m a customer today of HP’s software products, the ones that are transitioning over to Micro Focus, what will the transition be like for me?

Hsu: What we’re telling customers is that we’re going to honor the contracts we have with them and we will move those over into the new company without disruption. Because it will now be a U.K.-based business, there are pieces like our U.S. federal business where there’s a higher standard for how we set that up. We have to migrate our government contracts over to a new, standalone legal entity we’re setting up in the United States. What I tell customers is that we’re going to do this transaction with little or no disruption to you and your business. You will have to send a check to a different entity in the end but that’s essentially what we’re telling our customers. You talked about this a little bit at the beginning but can you spend a couple of minutes talking about why you picked Micro Focus to work with? It’s not a household name in the enterprise software business so why them for this important deal?

Hsu: I can’t do all the deal dynamics with you but what I will tell you is that we were really interested in Micro Focus from the get-go. This is a company that has been around for over 40 years. If you look at the genesis of this company, it is a small UK-based company anchored in COBOL. Circa Y2K, COBOL was front and center. Many folks looked at their business, including private equity and other investors, essentially said from 2000-2001 this business is going away. What’s interesting is that they took this COBOL business and continued to innovate on legacy technology and today that business COBOL is more than twice the size it was in 2000-2001. They report half years and in the last half year they reported 14 percent growth in their COBOL and CDMA businesses. That’s remarkable. It’s driven by innovation around visual COBOL which drove most of that growth.

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