British software firm Misys plc (London: MSY) said takeover discussions with Fidelity National Information Services Inc (FIS) have been terminated. Misys decided to reject FIS offer and withdraw from further discussions with FIS, as the offer materially undervalued the company.

"Bid talks for Misys have not played out as we had anticipated, with FIS seemingly playing hardball on price versus its initial indicative offer," said Milan Radia, an analyst at Jefferies. "This should not change the broader plan to divest the remaining divisions. Underlying traction is fine and Misys now has the luxury of time to assess any interest in the Banking and Capital Markets divisions,"

Radia said a price gap emerged and it seems that FIS sought to reduce the terms of its initial indicative bid, citing a shift in market conditions. Its scope to fund a higher offer may have been constrained by debt market uncertainties.

Radia said that FIS had already looked at Temenos as a target, but apparently dismissed it. ValueAct will have been influential in determining the outcome.

Amidst a "business as usual" stance, Radia suspects that Misys will over time attract inbound interest from trade and financial buyers alike for each of the two divisions.

Radia said the base case is that these will now be sold separately reflecting a trickier funding environment. At the turn of the year, Misys management acted to separate the two divisions to facilitate precisely this form of transaction.

Potential Shortlist of Acquirers

-- Infosys, on the other hand, remains Radia's favoured acquirer from the point of view of potentially bringing the greatest amount of synergies.

Infosys' banking software platform, Finacle, is already well established globally, while the services requirement would evidently not be a problem for Infosys and could be delivered in large part offshore.

"This would certainly facilitate the company’s scope to capture the lion’s share of the aggregate revenue opportunity stemming from BankFusion and related addon sales. Our understanding is that Infosys has already had some involvement with the development of BankFusion," said Radia.

-- FIS certainly fulfils the credibility and large-scale criteria, but perhaps lacks the integration resources outside of its North American footprint.

Despite the announcement of bid discussions ending and the commencement of share buy-backs by FIS, Radia does not rule out the return of FIS to the fray.

Strategically, FIS has made it clear that expansion of its international operations is a priority, particularly given the boost to group organic growth rates that it is currently seeing from international activities.

The services aspect is by no means insurmountable for FIS and could come via further hiring of services capability, continuing the current efforts of Misys management in this regard. In addition, partnerships with systems integrators could become attractive.

-- Private Equity Bidder + Partner: The wholesale banking M&A transactions this year-to-date have seen private equity feature prominently. Wall Street Systems is a good example, being acquired by Ion Trading in May 2011 -- Ion is essentially a private-equity backed vehicle established to consolidate financial technology companies.

Similarly, the current process by Thomson Reuters to sell its Kondor risk systems business has attracted substantial interest with private equity bidders, such as Cinven, Bridgepoint, Avista and Montagu, reported by Reuters to be the primary final round bidders, with no trade buyers apparently submitting second-round bids, which were due by 22 July 2011.

Notably, the mooted price range of $600 million to $650 million appears to be firmly at the upper end of initial expectations.

Radia does not see Misys as an obvious bidder for Kondor at this juncture despite today’s events and press commentary to the contrary given the high valuation. That said, it would add a further 5 percentage points of market share, taking Misys to 45 percent.

Misys Capital Markets should be particularly interesting to private equity given its commanding market share, current traction and scope to be used as a platform for further consolidation, Radia said.

Radia said Misys Banking, in contrast, is unlikely to be of interest to a financial buyer given the need for deep understanding of complex systems deployments, which is likely to be the preserve of existing major vendors in the space.

"Therefore, any transaction to sell Capital Markets to a private equity buyer would require an accompanying separate transaction to sell Banking. Buyers for the latter on a standalone basis would, in our view, not only include FIS and Infosys, but would also allow Temenos back into the frame," said Radia.

Post the appointment of Guy Dubois as Chief Executive Officer, it certainly has sufficient management depth and a strategic imperative to resolve revenue traction issues.

Radia said the services aspect of accelerating progress with BankFusion deployments could be addressed by Temenos implementation partners, including Capgemini and Cognizant, following the decision to largely externalise implementation services.

Misys stock fell 4.09 percent to 279.40 pence on the London Stock Exchange at 8.27 am British Standard Time.

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