For a moment yesterday, investors in Micro Focus must have thought the bubble had burst on their hi-tech stock when the shares plunged 67.5p to 452.5p. But they needn't have worried.
Micro Focus's pounds 303m all-share offer for Intersolv, the US software group, opened up huge arbitrage opportunities. So clever investors sold Micro Focus shares because they could get the same exposure at a lower price by buying Intersolv instead.
In fact, Micro Focus's biggest acquisition to date looks a good deal. The obvious synergies aside, it has negotiated a good price. The merger values Intersolv at just 2.5 times revenues.
Even after yesterday's fall, Micro Focus trades on a multiple of more than 3.5 times sales. What's more, the UK business is less profitable. Who said UK information technology stocks get a raw deal from investors?
The merger also has a compelling industrial logic. Micro Focus supplies software that helps developers design their own applications. Intersolv provides the tools and related services that allow developers to use those applications effectively.
Although the two companies sell via different channels, they reckon they share many common customers. The deal also strengthens Micro Focus's service arm, and gives it access to a telesales team who will help support existing customers.
The trick for Martin Waters, Micro Focus's chief executive, will be to weld the two product sets into an integrated offering.
The company will have to continue to service existing clients properly, too.
Longer term, Mr Waters also has to steer Micro Focus away from business related to the millennium bug and the euro, which still accounts for a fifth of the enlarged group's sales.
If the merger works out, there is potential for huge revenue growth. And with the combined entity trading on a historical earnings multiple of 30, yesterday's share price fall looks like a gilt-edged buying opportunity.
If Mr Waters delivers on his promises, the shares will never be this cheap again.Reuse content