I will keep the write-up short. Buying Misys (MSY LN) and shorting Allscripts (MDRX) will create a stub free on equity basis, for two profitable software divisions and at 2x EV/EBITDA and 0.9x EV/maintenance sales. You also have ValueAct who owns 25% of MSY, which should protect/unlock the value for shareholders.
Background: Misys is a UK software firm that had two divisions, finance (Banking, Treasury & Capital Markets), and healthcare. In Oct ’08, the company merged its healthcare division with US Based Allscripts and owns 54.5% of the new company.
Numbers: (MSY intraday, MDRX based on closing price on Friday).
MDRX Market Cap
USD/GBP Exchange Rate
MDRX Market Cap in GBP
Misys stock price
Misys Market Cap
Misys ownership of MDRX
Misys's MDRX Holding
Core banking / TCM
Tax (@ 30%)
NI on Maint Stream
P/E (Maint Stream)
Why the opportunity: After the deal had closed, MDRX went up 90% while MSY went down 15%. It is not clear to me what drove this divergence. I can only speculate that 1) investors may have high hope for MDRX under a new democrat regime under Obama, 2) Russell 2000 index increased MDRX’s weighting. 3) investors were skeptical of the TCM/CB division with all the trouble circling the financials industry. I think 1) and 2) are largely short-term issues that are largely irrelevant once you create the stub. As for 3), I would note current valuation is already discounting an Armageddon case. 44% of the revenue of the TCM/CB division is maintenance revenue. For the last 5 fiscal years, the division had sales of 240M, 245M, 267M, 273M, 301M, and EBITA of 38M, 41M, 38M, 48M, 51M respectively. I will leave the readers to decide how much of a discount multiple Misys's legacy division should get (there are plenty of sell-side reports discussing the impact). Curiously, MYS has 4 buys, 9 holds, 5 sells, while MDRX has 7 buys, 11 Holds and no sells.
1) Both stocks are pretty liquid, so the valuation gap should eventually close.
2) ValueAct may force some additional corporate action.