Software group Misys in talks with rival Temenos

LONDON Fri Feb 3, 2012 7:05am EST

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LONDON (Reuters) - Banking software firm Misys MSY.L and Swiss rival Temenos (TEMN.S) are in talks about an all-share merger in response to weak demand from their customers, six months after another suitor dropped a bid for the British company.

Investors have long speculated that Misys, which is 21.5 percent owned by hedge fund ValueAct Capital, would at some point find another partner, and the shares rose to a five-month high Tuesday on bid rumors.

But analysts Friday were skeptical about the prospect of a tie-up with Temenos, suggesting a deal could be a quick fix to tackle weak demand rather than making long-term strategic sense.

The two companies sell banking software to more than 1,000 customers each in retail and corporate banking, many of which are still reeling from the economic downturn, particularly in Europe. Misys also has a treasury and capital markets division.

Investors in Misys would prefer a cash offer from a bigger player, such as from India's Infosys (INFY.NS), or another approach from FIS, analysts said. Misys shares were down 0.7 percent at 323.4 pence at 6:27 a.m. ET.

The British company, which sold its healthcare software unit in 2010, was in talks with Fidelity National Information Systems (FIS.N) six months ago but the U.S. group walked away after Misys said its offer was too low.

Shares in Geneva-based Temenos, which have risen 30 percent since mid-January, rose to a six-month high of 19.2 Swiss francs Friday, although still below the 38.5 level of a year ago.

TIMING QUESTIONS

Panmure Gordon analyst George O'Connor questioned the practicalities of a merger: "Operationally the phrase 'buggers muddle' springs to mind in terms of the difficulties in banging these two businesses together," he said.

Investec also questioned the timing of the talks, saying that Misys was starting to see success from its multi-million pound investment in a new banking platform.

"With Bank Fusion having at last arrived, offering Misys the path to migrate its large installed base to a market-leading product, it seems a strange time to join with Temenos," it said.

The broker said cost synergies could protect against a difficult trading backdrop, but they would fail to create the value implied by the recent Misys rally.

"More important is whether further cash bids arise from elsewhere, such as FIS," it said.

Misys said last week it would need to make cost savings to keep it on track as its customers continued to be hit by deteriorating markets.

Temenos, in turn, is restructuring after a troubled 2011, and wrote off $27.6 million in July for poorly performing projects.

Analyst Cyrill Pluess at Kepler Capital Markets said a combined group could expand its market share substantially in one go, while at the same time beefing up its revenue base.

"However, Temenos in the midst of restructuring and facing weak demand from European banks and we think Misys is facing similar problems," he said.

Misys has a market value of about $1.72 billion, while Geneva-based Temenos is worth about $1.35 million, giving the British company about 55 percent of a combined group.

Misys said there was no certainty of a deal with Temenos, while Temenos said in a separate statement that discussions were "at an early stage and no decisions have been taken."

Temenos is being advised by Lazard.

(Additional reporting by Pascal Schmuck in Zurich; Editing by Erica Billingham)

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