The tale of the bank software company Misys, which its owner, the private equity industry darling Vista Partners, has been trying with no success to unload at an awfully rich price, sits at the intersection of several of our beats.
Moreover, in a bit of synchronicity, we started digging last night and discovered that Misys’ less than stellar history is awfully well known, as in both Clive and our Richard Smith, who specialize in different areas of bank software, were very familiar with the company and not in a good way. And on Tuesday, as we’ll explain in more detail, after a failed UK IPO last fall, Vista floated the idea of a US launch. Apparently the company may be a bit too well known in the UK for its sales patter to be believed, hence the tech-bedazzled US may offer a better opportunity.
Since Naked Capitalism has a cadre of bank software mavens, we hope knowledgeable readers will pipe up in comments.
Vista’s Ride with Misys
Misys came to our attention because a private equity contact ran into someone who did extensive due diligence on Misys when it was put up for sale in 2012. Not only did he recommend passing on it, but he said the company was heavily shopped and got no interest, save from its eventual buyer, Vista, and he was mystified as to what Vista saw in it.
Misys was a product of a rollup of smaller software companies in 1990s. As our Richard Smith remarked, even then the code was very creaky, “ancient stuff. They bought it up at a crazy rate and at crazy prices. It was a pile of crap thrown together.”
Now of course, in the world of finance, everything supposedly can be solved by price. Misys in 2012 was a potential fixer-upper. But the parties that turned it down included software firms in the financial services space.
Mr. Market remains skeptical about Misys. Vista paid £1.27 billion for Misys in 2012, and first tried floating it at a valuation of £4.75 billion last fall, then lowered the valuation by a full £1 billion before pulling the deal. While the British IPO market then suffered from Brexit and US election jitters, and some other launches were scuppered, Misys ran into investor doubts, per the Telegraph:
Even a discounted stock market debut proved out of reach, however, as analysts raised concerns over the figures provided to prospective shareholders and the market for new listings took a turn for the worse. Institutions increased their risk ratings for Misys, demanding a further discount that Vista was not prepared to offer.
Reuters had a long piece around the time of the fall 2016 attempt that was far from flattering: Misys struggles to show it has changed its ways ahead of IPO. Investors took such a dim view of Misys that they were pricing it at a multiple of “adjusted core earnings” of roughly 13, versus 19 and 15, respectively, for its major competitors Temenos and Sage. Keep in mind that Temenos turned down the opportunity to acquire Misys in 2012 after a round of due diligence. And even that 13 multiple put the reduced IPO target of £3.75 billion at the very high end of the investor valuation range of £3.15 billion to £3.75 billion. The Financial Times reported last October that the share launch was yanked at the very last moment, after a road show and book building process, with participants claiming the minimum cover had been achieved.
Fast forward to this year. The Financial Times reported that Vista is rethinking having a second go at a UK float. It also appears to harbor the fantasy of achieving its initial target of a £5.5 billion valuation, which reading between the lines, its underwriters appear to have talked Vista out of last year. Bear in Vista’s plans are still in flux, so the FT story might be a trial balloon:
People briefed on the company’s plans said Misys was looking to revive the float and a US listing on Nasdaq was under consideration. However, the company has not ruled out another attempt to list in its homeland.
And the article is basically a long-form press release as to why flogging Misys in the US is a perfectly reasonable idea, as opposed to a search for chumpier chumps. It gets more of its revenue from the US than the UK! However, it clearly has a bigger share of market in the smaller UK bank marker than in the US. The UK has been losing share in global IPOs for some time. But both the British and US IPO markets were soft last year.
Misys’ Real Problem: A Weak Player in a Mature Market
Vista’s real problem is that Misys’ warts are well known. The Financial Times reported last year that Misys was the antithesis of a growth story and efforts at currency chicanery failed to mask that fact:
The company said it achieved a compound annual growth rate of 8 per cent between 2014 and 2016.
However, accounts filed for the company’s Luxembourg-based parent show revenues for the year to May 2016 fell 4.8 per cent to $900.2m, from $945.8m in 2014.
The discrepancy is because of the decision by Misys to change its accounts from US dollars to euros as part of the IPO on the London market. It converted its 2016 revenues to stand at €811m, with the effect of significantly improving its growth rate.
Misys said that on a constant currency basis, its revenues increased from €754.5m to €803.7m between 2014 and 2016.
The banking software developer justified the switch by revealing it now derives 37 per cent of its revenue in euros, compared with 26 per cent in dollars and 23 per cent in sterling. Around 40 per cent of sales were denominated in dollars in 2014.
It is the second time that the Misys accounts have switched currency in four years. Vista switched its reporting from pounds to dollars in 2012.
Moreover, not a single one of the Financial Times’ reader comments on that October story or the one yesterday, about a possible US IPO, were positive about the company. Representative examples from the pink paper’s October story:
A very uninspiring proposition – Misys is mostly legacy software, tarted up to look like something new as and when the occasion demands. This company hasn’t been leading the way in anything since sprite graphics and shoulder pads were a thing.
Slashing R&D to boost short term operating profit and re-list with higher multiple (for a fundamentally lower quality profit stream)… yeah, no thanks. Surprised they even managed to get any demand – dire indictment of some fund houses’ IPO analytical ability.
Vista is asking too much for a maintenance mode portfolio. This is a classic cash generating machine and will continue to do for another decade or so, thanks to the nature of industry it serves.. Makes sense for an IT services company to acquire and build more services around the legacy. IPO is bound to fail – better look at consolidation synergy with your peers at Sungard, FIS, Temenos, Fiserv etc.
@v-Tech Yep, good points – and too many confusing currency changes. You have to ask why when a consistent currency value for revenue, cash flows and the accounts generally would have been more settling. Always a bit of a warning signal when a company starts fiddling with the basics in its accounts
And from the one yesterday:
Smart move – the US is their only hope – US investors will buy just about any piece of garbage, as long as it is tech-related.
Misys … that retirement home for aging, decrepit financial software that has not been maintained well for years due to the cost-cutting habits of the private equity owners. This is a dog and anyone in the industry that knows the software is well aware of it. Most of the acquisitions were dogs when they were first made, come to think of it.
Sure, there are some cashflows from the poor folks still using some of this software from a bygone era. Have fun doing your discounted cash flow analysis on those and praying that clients renew rather than growing a brain and upgrading to better packages (or retiring them altogether).
Awfulness of user interfaces, potential security risks of old code that no-one really cares about or owns anymore, general inflexibility. These applications have it all. The new new things that are promised in the banking space won’t arrive overnight, but they’re coming and will be the final death knell for Misys and their ilk. This genre of company is in terminal decline, thank God.
Claiming this is Brexit-related is truly desperate stuff FT. Misys failed to IPO in London because it was overpriced. It is a reflection of quality that the London market is sufficiently discerning to refuse assets that don’t meet rational investment criteria. This is a good thing and if London continues to refuse overpriced tech assets then that’s also a good thing, particularly if your pension is invested in equities!
Misys’ website is awfully vague as to what it actually does (as in it has a grandiose but fuzzy overview with detail about too many products and customers to give a good feel), but the short version is it provides software mainly to mid-sized and smaller banks. And without prejudicing him with any of the recent stories, we asked Clive about Misys. Turns out he know it well:
My TBTF uses its product and relies heavily on it to manage Trade Finance operations.
FACTUAL BACKGROUND : Misys has a long history of producing good quality but niche market segment software. Its main product line is “Trade Innovation+” (which users, such as my TBTF almost always refer to as “TI+”). The product marketing brochure is here https://www.misys.com/media/386458/fusionbanking-trade-innovation_swo_final.pdf (this is a bit heavy on marketing guff but is a not-too-gussied-up description of what their key product does; software companies often suffer from incurable marketing guff-speak but this in itself does not necessarily mean the product is a scam). TI+ is a mature, capable product and generates considerable licencing fees especially in the UK but also has non-UK banks in it user-base. It is considered the “industry standard” for managing trade finance operations at commercial banks.
FACTUAL PROBLEM STATEMENT: While historically able to enjoy dominance within its niche and rely, to an extent, on user/customer inertia and the inherent risks and costs for existing users if they were to consider moving to an alternate product from a different supplier, nevertheless Misys is still vulnerable to new competition eroding its margins. Suppliers such as China Systems (http://www.chinasystems.com/solutions/tradefinancebackendsolution.html) have developed and are aggressively targeting Misys’ niche through products which match TI+ in terms of features, but have lower cost bases because they do not need to support legacy installations. Misys is also vulnerable to an overall declining market because (financial) trade services, while a highly profitable service for financial institutions, is risky and complex operationally and regulatory interventions have increased capital requirements due to higher risk weightings. Some smaller sub-scale trade finance providers have withdrawn from the market entirely. Misys is therefore caught in a pincer movement — reduced size of market potential and increased competition within the overall smaller market. It is likely that their TI+ product has a higher maintenance cost base than any new entrant. Set against that is customer loyalty (this is forced due to legacy installations being deemed too risks or costly to migrate to a new product). Whether the latter factor is able to offset the former factor and preserve Misys’ margins in the medium-long term isn’t obvious.
SPECULATIVE COMMENTARY: What, then, is a company in Misys’ situation to do? Conventional economic wisdom states that the business could wind itself up if it cannot reduce its cost base to compete with the lower-cost new entrants, sell itself to one of the new entrants, try to buy one of the new entrants or, finally it should obtain an infusion of new investment and try to diversify although there are no clear untapped niches in software or software services available any more. Which approach is/are Vista adopting? What expertise do they bring that makes whichever turnaround/survival strategy more compelling or likely to succeed?
But as we have often seen in the software industry there is another temptation – financial engineering. Autonomy, Satyam Computer Services, another UK software firm Sage under investigation (currently sub judice so no reporting possible) – show that financial engineering can become out-and-out fraud. It is all-too-easy to recognise revenue incorrectly and software company financial statements are notoriously opaque and prone to window-dressing such as with Dell/Intel https://www.sec.gov/news/press/2010/2010-131.htm. Is it possible that Vista are trying to conceal significant losses using the smokescreen of an IPO? You’d have to, if you were doing due diligence worthy of the name, consider it as at least an outside possibility.
I also asked, given how old the underlying code is, whether Vista could have revamped the business by now. Clive’s reply:
No way could a turnaround be complete. The competition is still as fierce, if not more so. There are no new entrants from the banks into the trade finance market, at least not in any material numbers, so the market isn’t growing. And for the established customer base, Misys’ fees are under pressure — even my TBTF (and we get ripped off by everyone going, we really are easy, easy marks) crammed down Misys on fees and got them to move from a Time and Materials rate card to Fixed Price with no premium and no contingency. If they were not chasing every $ of fee income, they (Misys) would never have agreed to this. And if my TBTF is price gouging Misys, the real sharks must be ripping their faces off.
So this is not a pretty story, and Clive raises an issue that the rest of the press has sanctimoniously avoided: that other big players in this space have gotten fraudulently creative with their accounting. Buyer skepticism is alway important with IPOs, and there are good reasons to be particularly vigilant in the cases of Misys.