Misys chief leaves investors with messy deal

Before the ink has even dried on the agreement over key merger terms with Temenos, Mike Lawrie, chief executive of Misys has already agreed on his next role, running Computer Sciences Corporation, the troubled US IT services company.

The American chief executive is likely to leave with a pay-out of up to £1.7m, on top of a £2m bonus that investors criticised as excessive. He faces an even bigger challenge at CSC, which is still reeling from a $1.5bn writedown of its National Health Service contract.

Mr Lawrie, formerly a partner at ValueAct Capital, the activist investment company that is Misys’ largest shareholder, had a brief to turn round and sell the company within five years. He missed the deadline by only a few months, but whether he is leaving Misys shareholders with a workable deal is still unclear.

The grand idea behind the merger of Misys and Temenos is to create a global leader in banking software, a $2bn company by market capitalisation that would be big and credible enough to sell its technology to some of the world’s largest financial institutions.

Between them Misys and Temenos already sell software to about 1,000 banks, providing them with the core banking platform which runs all the day-to-day business – from calculating current account balances to printing off statements. But most of these customers are smaller tier 3 and 4 institutions. The big prize of running the core banking systems for a large institution, such as Barclays or Lloyds TSB, has so far eluded both companies.

Breaking into this lucrative market will not be easy. Some Temenos shareholders are understood to be unhappy about the proposed terms of the merger, which would see the Swiss company’s shareholders get just 46.1 per cent of the new company, while Misys shareholders would have 53.9 per cent.

Analysts said the deal had been struck at a bad time for Temenos, which has historically grown faster than Misys, but has been worse hit by recent economic uncertainty. It gave a profit warning last summer as big banking customers put software orders on hold. Investors are expecting poor annual results from Temenos later this month with sales of software licences estimated to be down about 15 per cent.

The two companies report their annual results at very different times making it difficult to compare performance. However, analysts estimate that Temenos will have earnings before interest and tax of about $70m this year, stripping out anomalies from acquisitions, compared with about $96m for Misys in a similar period.

Although Misys shares have lost about a quarter of their value over the past year on worries about banks cutting back on spending, Temenos has fallen more than 50 per cent.

“If they had merged last year, Misys would have been the smaller party,” said Julian Yates, analyst at Investec. “Misys have timed this quite well.”

Stefan Gaechter, analyst at Helvea, said some Temenos shareholders had told him they were disappointed with the exchange ratio.

“The market capitalisation of Temenos clearly did not reflect the longer-term value of the company, while Misys has been trading at a premium because it has been seen as a takeover target,” he said.

The two companies have agreed an informal, 30-day exclusivity period, but some analysts are still expecting a rival offer to emerge for either Misys or Temenos. Misys was in failed takeover talks last summer with Fidelity National Information Services of the US. Indian companies such as Infosys and Tata Consultancy Services, which have rival financial services software businesses, could also be interested in buying one of the two companies, analysts said.

Even if a merger is agreed, combining the two businesses would be messy. Misys, which employs over 4,000 people and Temenos, which has 3,500 staff, have promised large cost savings from cutting back office and research and development staff, and closing duplicate offices around the world. Analysts have estimated savings at about $100m a year.

The combined company would have to decide which of the two rival flagship banking software systems – Misys’ BankFusion or Temenos’ T24 – it would support long term.

“The danger is that customers would sit on their hands while they wait to see what the product road map is like,” said Investec’s Mr Yates.

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