Open Text Corp.’s largest shareholder publicly backed the company’s acquisition of Micro Focus International Plc, saying the deal makes financial sense despite a 99 per cent takeover premium.

Jarislowsky Fraser Ltd., which owns a 5.6 per cent stake in the Canadian enterprise software company, said the price paid for Micro Focus is still appealing for long-term investors. Open Text’s offer values the UK-based target at US$6 billion including debt.

“The timing of the acquisition is attractive owing to the actions taken by Micro Focus over the last few years and the valuation paid for the company,” Charles Nadim, head of research and portfolio manager of Canadian equities at Montreal-based Jarislowsky, said by email. “Micro Focus will leverage Open Text’s infrastructure to improve its revenue and profitability outlook.”

Still, investors reacted harshly, driving Open Text shares down 14.4 per cent to US$31.89 in New York -- the biggest one-day drop since 2006. Canadian Imperial Bank of Commerce analyst Stephanie Price described Micro Focus as a “multiyear turnaround story” and cut her price target to US$44 from US$51. 

'STABILIZATION'

Open Text Chief Executive Officer Mark Barrenechea said his company is buying a good business at a reasonable price, despite its recent struggles.

“Micro Focus is on a great path toward stabilization. We’ve known this business for many, many years,” Barrenechea said on BNN Bloomberg Television on Friday. “Open Text can add significant value.”

After the merger, Open Text will sell in about 120 countries and have better scale to compete with larger enterprise-software players, Barrenechea said. The deal will make Open Text look more like SAP SE and Oracle Corp. “and that’s good company to be in,” he said. 

RBC Capital Markets analyst Paul Treiber said Micro Focus’s declining revenue is a risk, but the deal valuation of 6.3 times Ebitda represents a low multiple.  

The combined entity would have revenue of more than US$6 billion and adjusted earnings before interest, taxes, depreciation and amortization of over US$2 billion.