UK Software Sector Set For Shake Up

The U.K. software sector looks set for a shakeup with financial software company Misys PLC (MSY.LN) and business application management firm Micro Focus International PLC (MCRO.LN) in the cross-hairs of suitors.

U.S. financial data-processing company Fidelity National Information Services Inc. (FIS) said Thursday it is behind a bid approach for Misys, just 48 hours after the U.K. company said it had received a preliminary approach that could lead to an offer. Micro Focus also on Thursday said it evaluating "all realistic options" following recent bid interest from private equity firms.

Still, for any acquirer, Micro Focus and Misys are very different propositions.

Micro Focus has been losing deals, particularly in North America, and in February issued its second profit warning in six months, forcing it to restructure. Executive Chairman Kevin Loosemore, who took on the chief executive role in April following the surprise departure of Nigel Clifford after only 11 months in the job, described fiscal 2011 as a "lost year" for the company, which has struggled to integrate a flurry of acquisitions in recent years. He said Thursday a turnaround is underway but is unlikely to bear fruit until next year.

Micro Focus first confirmed a takeover approach on April 26, then a few weeks later it named some of its suitors as private equity firms Bain Capital LLC and Advent International Corp.

Micro Focus's share price plunged after the February profit warning, hitting a low for the year to date of 274 pence on Feb. 24, but has since recovered. By 1304 GMT Thursday, it shares were trading at 322 pence, albeit down 9% on the day in a weaker London market after warning that sales would be down in the current financial year. Its market value is around GBP662 million at the current share price.

By contrast, Misys' house is already in order after selling its stake in Chicago-based healthcare services firm Allscripts Healthcare Solutions Inc. (MDRX) in progessive stages for a total profit of GBP619.6 million. The group has returned GBP145 million to shareholders via a share buyback, and in November it agreed to buy Dublin-based software maker Sophis SCA for GBP235 million to strengthen its position in the financial services sector.

In confirming its interest in Misys, Fidelity National Information Services cautioned that "there can be no certainty that an offer will ultimately be made for Misys nor as to the terms on which any offer might be made."

Confirmation of the suitor's identity was welcomed by the market, and in afternoon trade Misys' shares were up 2%, or 8 pence, at 419 pence, making it the fourth highest riser on the FTSE-250 mid-cap index and valuing the company at around GBP2.01 billion. The shares have risen 33% over the past three months on higher revenue and orders amid healthy demand for its new products.

Angela Eager, research director for enterprise software and application services at technology analysis firm TechMarket View LLP, said the plays for Misys and Micro Focus are case specific. They each have had "a lot of ups and downs in the past with some potential good business ahead of them, so it makes sense to pick a target in the crowd," she said.

Eager expects more acquistions within the U.K. software sector, with medium-sized businesses in particular "attractive for larger organizations who are looking to expand their geography or to expand their product line...there's a lot of potential there."

In addition to the interest in Micro Focus and Misys, Sage Group PLC (SGE.LN) has also been touted as a possible takeover target following a recent report in the trade press that it is in talks to be acquired by German enterprise software giant SAP AG (SGE.LN) or International Business Machines Corp. (IBM). Sage declined to comment on the report earlier this week, but Panmure Gordon analyst George O'Connor at the time dismissed the speculation as having no merit. Sage has a market capitalization of around GBP3.7 billion.

U.K. software groups Autonomy Corp. (AU.LN) and Logica PLC (LOG.LN) have also been mentioned by traders as possible takeover targets in the past, with Microsoft Corp. (MSFT) and Oracle Corp. (ORCL) touted as potential suitors for Autonomy.

Demand for Autonomy's products has risen substantially amid the increased regulatory burden on companies for information recording and retrieval, and it has recovered from a late-2010 profit warning to recently buy selected assets of Iron Mountain Inc.'s (IRM) digital division for $380 million.

Logica provides consulting, outsourcing and information technology services to governments and companies across Europe, and has submitted proposals to help the U.K. government--its biggest domestic customer which generates 60% of its U.K. revenue--to achieve some of the cost savings. The company last month reported better-than-expected first-quarter results, thanks to strong demand for IT services from the private sector. It also flagged that its embattled U.K. business will return to growth in the second half of 2011.

It isn't just the U.K. software sector that faces a shake up. The electrical retail sector is also facing change as Kesa Electricals PLC (KESA.LN) and Best Buy UK consider their future on the high street. Drinks giant SABMiller PLC's (SAB.LN) move on Australia's Foster's Group Ltd. (FGL.AU) earlier this week may trigger a battle for one of the industry's few remaining jewels.

-By Lilly Vitorovich, Dow Jones Newswires; 44-0-207 842 9290; lilly.vitorovich@dowjones.com

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