Is Misys Moving Towards an Exit?

Amidst the current bout of speculation regarding a possible takeover bid for Misys plc (London Stock Exchange: MSY), Jefferies & Co. revisited its long-held view that it is now in the final phase of the value realisation project that Mike Lawrie and ValueAct Capital embarked upon four years ago.

"We think the remaining two divisions are likely to be sold. We see upside of at least 20 percent from current levels and reiterate our 'Buy' rating," said Milan Radia, an analyst at Jefferies.

Radia said Misys has fully separated its core banking and capital markets divisions, perhaps indicating its willingness to sell these divisions separately. In the absence of a full bid, Misys will, in the analyst's view, seek to sell core banking first.

Radia said the win rate of BankFusion has been running ahead of live implementations, potentially making a sale to a vendor with greater integration resources attractive.

During the auction process for Misys that was held in 2006, the key bidders included US financial systems vendors such as Fidelity National Information Services (NYSE: FIS), Fiserv Inc. (NASDAQ: FISV) and Sungard.

The Indian vendors, Infosys Technologies Limited (NASDAQ: INFY) and Tata Consultancy Services (TCS) in particular are obvious candidates, in Radia's view, given their respective strengths in banking software.

But, Radia would not rule out HCL Technologies given its existing relationship with Misys. Lastly, the analyst believes Temenos would likely be a keen bidder, but may lack the resources to pull it off.

Radia said there has essentially been a queue of transactions in the capital markets segment. Following Misys' acquisition of Sophis in November 2010, Wall Street Systems was acquired by Ion Trading (a private equity-owned entity) in April after being up for sale for a while.

News reports suggest that Thomson Reuters is in the process of divesting its Kondor business. There is likely to be/have been competitive tension in each case, but valuation information is scarce, Radia said.

Radia does not anticipate any issues with respect to fiscal 2011 organic revenue growth estimate of about 5 percent and operating margin of 18.5 percent, both within guidance. Multiple recent data points from Capgemini, Temenos, etc., suggest good levels of activity in banking IT.

Radia update estimates to reflect a lower interest charge assumption in fiscal 2011, resulting in an increased fiscal 2011 EPS estimate of 8.9 pence (7.2 pence previously).

"Despite the sustained rerating over the past few years, management value creation has kept pace and the stock remains, in our view, undervalued. Our analysis implies an increased target price of 4.60 pound sterling. We reiterate our Buy rating. Key risk: financial services volatility," said Radia.

Misys stock gained 4.30 percent at 395.30 pence on the London Stock Exchange at 11:53 am BST.