Misys takeover talks

Date: 04 Aug 2011


Rajeev Bahl, analyst of private financial services group Matrix, comments on the global application software and services company Misys:

TP: 350p, SP: 357p, Mkt Cap: £1.2bn

Misys, the global application software and services company, has confirmed that takeover talks with Fidelity National Information Services (FIS) have ended. Given FIS’ need to gear-up to buy Misys – we estimate to 3.7 times net debt/EBITDA, at the limit of sector norms – potential synergies would have been key. Signs of weaker end-market demand such as Temenos’ warning will also have impacted potential exit value.

Undisturbed price of 320-330p: there are no other bidders for Misys at this stage, and we expect this process would have flushed out any other interest. As such, we expect Misys to return to trading minus any bid premium.

HOLD, 350p TP: recent results are fine but not stellar. Misys’ recent results were in line, and included encouraging licence order intake trends in Core Banking – 30 percent of profits. However, product quality issues meant licence order intake in the treasury and capital markets division – 70 percent of profits – was weaker in Q4, meaning Misys entered the current quarter with poorer-than-usual visibility over all-important licence revenues. Combined with general uncertainty in the core banking space such as Temenos’ recent warning, we stick with our HOLD view on Misys and 350p TP, which implies 21.3x CY11E, 16.6x CY12E.

Elsewhere in the sector: our favoured sector picks remain SAP (BUY, €50 TP) and Autonomy (BUY, 2100p TP). In the fin-tech space we upgraded Temenos yesterday (ADD, CHF 20 TP) on a favourable risk-reward balance.

For investors looking for M&A potential we would flag Micro Focus (BUY, 420p TP). Micro Focus still has three approaches that could become bids, is inexpensive (7.5x CY11E P/E, five percent dividend yield, less than 10 percent net free cash flow yield) with low expectations, lower earnings risk and a better market position in a less volatile end market.

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