Misys MSY LN
November 22, 2011 - 9:51pm EST by
gs1
2011 2012
Price: 2.73 EPS $0.20 $0.23
Shares Out. (in M): 336 P/E 13.7x 11.9x
Market Cap (in $M): 920 P/FCF 0.0x 0.0x
Net Debt (in $M): 94 EBIT 0 0
TEV ($): 1,014 TEV/EBIT 0.0x 0.0x

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Description

This is an abridged version of the write-up with more detail to come (trying to sneak in my submission ahead of Thanksgiving), but Misys may be familiar to some of you (it has been written up as a stub trade before).
 
Background
 
Misys is a UK-listed financial services software company.  It was previously a hodge-podge of various software divisions until ValueAct arrived in the middle part of the decade, installed new management and pushed for the business to rationalize.  Until last year, it had a 51% stake in Misys-Allscripts (MDRX), a US-listed healthcare software company that was produced as a result of Misys's health software business and Allscripts.  The valuation of that business expanded as electronic medical record adoption software was incentivized by post-2008 legislation.  The implied valuation of the financial services business was nonsensical (2-3x EBIT) once you backed out the value of the listed stake - management was aware of this, and sold its stake via a placement back to the company and onto the market, facilitating a merger with ESRX.  With the proceeds, management bought back stock in the parent company, thereby forcing a re-rating of the stub and demonstrating its focus on shareholder value.
 
The company is now focused in a couple of divisions: treasury and capital markets; and banking.  They also acquired a business, Sophis, in the TCM sector. In the TCM business they sell risk management, treasury analytics and trading software to buyside and sellside clients. In the banking division, they sell core banking software to Tier 2 and below commercial/retail banks.
 
Incentive alignment
 
The alignment of incentives here is good. Mike Lawrie (the CEO) was a former partner at ValueAct.  ValueAct owns 21% of the equity, so the CEO has the best interests of shareholders at heart (he also owns stock directly).  He also has a healthy share compensation package with vesting and value tied to stock price (see table below - he clearly has incentives to get to a price near 5 GBP vs. the 2.73 today).  With the MDRX deal they did, mgmt has demonstrated its ability to act in shareholders' interests.  The CEO is approaching retirement age, so it's highly possible that they seek some kind of corporate solution (e.g. a sale) in order to realize value here.
 
Share price threshold achieved in the performance period                                        Maximum number of shares which will vest

£3.75                                                                                                                  133,333
£4.00                                                                                                                  426,667
£4.25                                                                                                                  720,000
£4.50                                                                                                                 1,013,333
£4.75                                                                                                                 1,306,667
£5.00                                                                                                                 1,600,000
 
Potential for mispricing
 
Misys has been a rumored takeout target for a while.  Earlier this year, they were in discussions with Fidelity National.  Arbs (presumably) piled into the stock, before FIS walked away, cratering the stock from 410 into the low 200s before it has rallied back somewhat.   As a result of this experience, I believe the market is skeptical of an eventual strategic solution.  Given the amount of time that has passed, it's tough to say that technical selling from arbs has led to the current opportunity, but I believe the experience earlier this year has definitely convinced many investors to stay away from the name.
 
Ways to Win
 
1. Treasury and Capital Markets revenue rebounding (cyclical)
2. BankFusion - the company has struggled to introduce new products into its banking customer base but is now rolling out its new BankFusion product to help it win license sales; I don't believe much of this is factored into consensus estimates (some is, but it's possible the company is sandbagging guidance to the Street)
3. The company sells its banking business to a larger player that can sell products into the customer base for a decent price, leaving a good TCM business standalone that
4. or the company gets acquired in its entirety
 
 
 
 

Catalyst

Execution of BankFusion strategy
Potential corporate activity
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    Description

    This is an abridged version of the write-up with more detail to come (trying to sneak in my submission ahead of Thanksgiving), but Misys may be familiar to some of you (it has been written up as a stub trade before).
     
    Background
     
    Misys is a UK-listed financial services software company.  It was previously a hodge-podge of various software divisions until ValueAct arrived in the middle part of the decade, installed new management and pushed for the business to rationalize.  Until last year, it had a 51% stake in Misys-Allscripts (MDRX), a US-listed healthcare software company that was produced as a result of Misys's health software business and Allscripts.  The valuation of that business expanded as electronic medical record adoption software was incentivized by post-2008 legislation.  The implied valuation of the financial services business was nonsensical (2-3x EBIT) once you backed out the value of the listed stake - management was aware of this, and sold its stake via a placement back to the company and onto the market, facilitating a merger with ESRX.  With the proceeds, management bought back stock in the parent company, thereby forcing a re-rating of the stub and demonstrating its focus on shareholder value.
     
    The company is now focused in a couple of divisions: treasury and capital markets; and banking.  They also acquired a business, Sophis, in the TCM sector. In the TCM business they sell risk management, treasury analytics and trading software to buyside and sellside clients. In the banking division, they sell core banking software to Tier 2 and below commercial/retail banks.
     
    Incentive alignment
     
    The alignment of incentives here is good. Mike Lawrie (the CEO) was a former partner at ValueAct.  ValueAct owns 21% of the equity, so the CEO has the best interests of shareholders at heart (he also owns stock directly).  He also has a healthy share compensation package with vesting and value tied to stock price (see table below - he clearly has incentives to get to a price near 5 GBP vs. the 2.73 today).  With the MDRX deal they did, mgmt has demonstrated its ability to act in shareholders' interests.  The CEO is approaching retirement age, so it's highly possible that they seek some kind of corporate solution (e.g. a sale) in order to realize value here.
     
    Share price threshold achieved in the performance period                                        Maximum number of shares which will vest

    £3.75                                                                                                                  133,333
    £4.00                                                                                                                  426,667
    £4.25                                                                                                                  720,000
    £4.50                                                                                                                 1,013,333
    £4.75                                                                                                                 1,306,667
    £5.00                                                                                                                 1,600,000
     
    Potential for mispricing
     
    Misys has been a rumored takeout target for a while.  Earlier this year, they were in discussions with Fidelity National.  Arbs (presumably) piled into the stock, before FIS walked away, cratering the stock from 410 into the low 200s before it has rallied back somewhat.   As a result of this experience, I believe the market is skeptical of an eventual strategic solution.  Given the amount of time that has passed, it's tough to say that technical selling from arbs has led to the current opportunity, but I believe the experience earlier this year has definitely convinced many investors to stay away from the name.
     
    Ways to Win
     
    1. Treasury and Capital Markets revenue rebounding (cyclical)
    2. BankFusion - the company has struggled to introduce new products into its banking customer base but is now rolling out its new BankFusion product to help it win license sales; I don't believe much of this is factored into consensus estimates (some is, but it's possible the company is sandbagging guidance to the Street)
    3. The company sells its banking business to a larger player that can sell products into the customer base for a decent price, leaving a good TCM business standalone that
    4. or the company gets acquired in its entirety
     
     
     
     

    Catalyst

    Execution of BankFusion strategy
    Potential corporate activity
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