A software maker, its stock pumped higher for months by takeover rumours, uses the puffed-up shares as currency to buy its closest rival. This is the kind of deal that helped inflate the dotcom bubble. Investors, therefore, may not welcome its return.

This week Misys and Temenos set out terms of a £2bn friendly merger to create the world’s largest maker of banking software. It was, on paper at least, Misys buying Temenos: the former’s shareholders would take 53.9 per cent of the enlarged company. The ownership split was decided after Misys shares surged nearly 50 per cent since mid-November, largely on hopes of a different predator emerging.

Though the takeover terms may have favoured Misys, the change of control went in the other direction. Temenos directors take both of the top jobs in the corporate boardroom, which will remain in Switzerland.

It was not the deal investors had been expecting. Both Temenos and Misys have fallen by about 13 per cent since news of their merger leaked last week.

So are investors right to be so disappointed?

There may be some ruefulness among Misys shareholders, given that its management last year spurned an approach from its US peer Fidelity National Information Services (FIS) as undervaluing the company. At the time, Misys shares were trading 45 per cent higher than where they stood on Friday.

But FIS has so far shown no inclination to return, and no alternative offers have emerged in the year or so that Misys has been in play. At the moment, a nil-premium merger is the only deal on the table.

It is pointless, the bankers say, to concentrate on nebulous takeover premiums when the argument should be about value creation. No one is being asked to sell out, they argue. The only thing that should matter to investors is their slice of future earnings from what should be a bigger, stronger company.

The same argument has been happening elsewhere in the City. Xstrata management has been trying to convince its shareholders to accept an all-stock takeover offer from Glencore. They have faced protests that the offer provided a takeover premium of just 8 per cent to the undisturbed price of Xstrata, rather than the 30 per cent premiums that are the norm in the mining sector.

Under the current terms, Xstrata shareholders would receive a 45 per cent stake in the combined entity – too small, some say, given it is Xstrata providing the higher asset quality, balance sheet strength and long-term growth. Most analysts believe Glencore will have to sweeten its offer, if only slightly, to win their approval.

We may be seeing such arguments more often. Misys and Glencore have their own unique problems, but their choice of all-share deals hints at a broader uncertainty that has choked dealmaking. With elevated volatility resulting in mergers and acquisitions falling to their lowest levels in nearly a decade, equity funding can be seen as lower risk.

“A stock transaction takes the debate about whether or not shares are the right price out of the game,” says a broker. “If one stock is overvalued, the other probably is as well.

“When paying with cash, you have to make an absolute call on the value of the company you are buying. To an extent, an all-share deal removes the market risk.”

Moreover, an all-share deal gives the market some leeway to decide the right price for itself. “If an acquirer is seen to be overpaying and offers stock, investors will sell until they aren’t overpaying any more,” the broker says.

The same arguments were applied to the dotcom bubble. Valuations may have been unjustifiably high but, when equally inflated equity provided the currency to a deal, the risk of overpaying mattered less.

These were the excuses used for mistakes such as Yahoo paying $5.7bn for Broadcast.com, and Excite’s $6.7bn merger with @Home. It all appeared to be a zero-sum game. Yet, once the bubble had popped, the shareholders still suffered.

The irrational exuberance of the late-90s may have been replaced by a gloomier kind of uncertainty, but investors still have reason to be wary of the argument that a valuation becomes arbitrary when expressed in stock.


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