The IPO of Misys should have had everything going for it. Having been listed before, the company was already known to equity investors. With four global coordinators whose equity capital market (ECM) credentials are nothing short of stellar, a further three bookrunners and a financial adviser, the deal had no shortage of expertise to guide it to the finish.
Secondary markets have been jittery but were performing moderately well – the FTSE 100 is up nearly 10% since the start of the year. And the backdrop of the software firm’s client base being under pressure to look for smarter ways to cut costs ought to have given it an attractive pitch as a restructuring play.
But still it failed. Spokespeople for Misys did not respond to interview requests for this article, but Euromoney has spoken to more than a dozen ECM professionals about the deal, all of whom requested anonymity to discuss it.
These kinds of updates are sometimes like someone suddenly telling you that you’re getting married tomorrow. You might start to think, I didn’t really think about this and I’m not sure I want to be in it after all
- Syndicate official
The reasons they give for the deal’s collapse on October 27 vary widely. What’s clear is that with so many moving parts, almost anything can be blamed – there are at least 19 reasons (see box below) cited in bankers’ discussions with Euromoney.
However, if you had to pick one fault that likely made all the other factors insurmountable, it would be the tight timeframe – a pressure that meant feedback was less informed than usual, an already aggressive valuation started to look even more so, and the process was more vulnerable to external jitters than it should have been.
The blame for that pressure, bankers say, is largely down to a timetable set by Misys’s private equity owners, but could those bankers themselves have offered better advice?
Throughout its history, Misys has been something of a chameleon. First set up in 1979 to sell computer systems to the insurance industry, the company went through a blizzard of mergers and acquisitions over subsequent decades that saw it broaden its focus through healthcare to asset management and banking.
By 2011, it had mostly shed its healthcare assets to concentrate on the financial services sector, part of a strategy to put behind it a difficult period after the bursting of the dotcom bubble.
|Blame game: 19 reasons people give for why the Misys IPO failed|
The IPO of software company Misys was cancelled on October 27 after a tough period for UK IPOs and amid a challenging market backdrop. But why do bankers think the deal failed? Below are the 19 reasons, in no particular order, they gave in various discussions with Euromoney during the past week:
1) The equity story: Buy side didn’t buy it
2) Reporting currency: I’m confused. What exactly was the revenue growth then?
3) Syndicate structure: Too many glo-cos, not enough control
4) Timeframe: A summer mandate and a US election deadline? Never going to happen
5) Market conditions 1: Macro jitters — rates, inflation, growth
6) Market conditions 2: Other deals trading badly
7) Time of the year: Active investors are suffering, not much time left to find alpha
8) Valuation: Seller looked at Temenos, but market looked at Sage
9) Shifting sands: Deal smaller than I thought, less interested now
10) Been listed before: What’s changed to justify new valuation?
11) Seeing the word “punchy” in investor feedback
12) Brexit: obviously
13) US election: obviously
14) PE shareholder paying itself? Hmm
15) Client sector: Shaky outlook
16) Issuer sector: Banking software. Nuff said
17) Noise, fanfare: Too much pre-deal
18) Book quality: Not enough anchors, too much fluff?
19) Early look premarketing: only one round, not two
That period had included a profit warning in 2005 for the banking division, with shareholders forcing the company to withdraw parts of a bonus scheme in response. It also marked the end of the tenure of Kevin Lomax, the computer graduate who had helped found the company before becoming executive chairman in 1985.
Misys stock was first traded in 1987, on a now-defunct junior board of the London Stock Exchange called the Unlisted Securities Market (USM), the predecessor of today’s Alternative Investment Market.
The USM was appealing to small, young firms such as Misys, allowing low free-floats of less than 25% – an eerie harbinger of something that would become an issue in this year’s failed IPO – as well as freeing them from many other requirements of the main market.
By 1990 it was ready to make the jump to the Official List, where it stayed for 22 years, joining the FTSE 100 in 1998, the first IT company to do so. It remained public until its acquisition for £1.3 billion by private equity firm Vista Equity Partners in 2012, by which time it was a FTSE 250 member.
Vista brought in a new CEO, Nadeem Syed, who had previously been COO at HR software provider SumTotal, to implement a restructuring and streamlining plan that he now says has made Misys into an “industry leading financial software company with the broadest and deepest product portfolio in the market”.
As far back as 2014, talk had circulated that Vista’s owner was considering a sale or new IPO of the business, but it was not until July 2016 that the pace started to pick up, with banks mandated for what was still said to be a process with both options open – either a listing or a trade sale.
Moelis was financial adviser to the company; Bank of America Merrill Lynch, Goldman Sachs and JPMorgan were mandated as sponsors, global coordinators and bookrunners; Morgan Stanley was an additional global coordinator and bookrunner; Barclays, Credit Suisse and Deutsche Bank provided yet more bookrunners.
Valuation was sketchy at this point, but amid the flurry of coverage in the media the figure of at least £5 billion for enterprise value, including debt, began to circulate. That put the company at roughly three times the value it had when it was taken private.
It also meant that the deal quickly assumed an importance almost greater than its significance to Misys itself: at that stage, some thought that a 25% free-float could make it the biggest IPO in London for more than a year, after Worldpay’s £2.4 billion flotation in October 2015.
Bankers close to the deal say it was here that the first – and perhaps most important – problem became apparent. The selling shareholder wanted the deal wrapped up before the US election on November 8. The mandate had come after the turmoil of the UK’s Brexit referendum on June 23 and markets were already febrile.
Now investors were going to be asked to buy a stock that some of them had sold just four years earlier, but at a much higher valuation, the justification being a complex transformation story that would take time to communicate and absorb.
Would there be enough time to talk them round, against a backdrop of political and macro uncertainty that was hardly going to disappear between now and the US election?
Doomed to fail
The answer to that question, as is now abundantly clear, was no. By the time the formal intention to float was announced on October 6, bankers on the deal should have been fairly confident they knew where the core buyer base was going to be and what they would pay. Many say they were anything but.
Some of the jitters were doubtless caused by what was going on around them. Several other IPOs, including PureGym and TI Fluid Systems, had just been cancelled. Waste disposal company Biffa had struggled to market. Danish firm Nets completed a $2.4 billion-equivalent listing but also traded down. And healthcare firm ConvaTec was due to price its roughly £1.5 billion pre-shoe IPO just ahead of Misys.
The two week bookbuilding period for Misys opened on October 17, with a price range of 210p to 250p. The company said it was targeting £550 million of proceeds from the sale of new shares, while Vista would also be selling down £100 million to £200 million of secondary shares.
Additionally, the IPO would now result in a free float of just 20%, down from the 25% standard UK Listing Authority (UKLA) requirement, after the company obtained permission from the UKLA for a lower level. The company had still been touting a 25% free float as recently as the October 6 filing of its intention to float.
At up to £750 million and with the smaller free float, the deal was now looking rather smaller and less important than the first unofficial chatter had suggested. That risked making it tougher to attract attention.
Some maintain there had been good early interest that had looked promising.
“There was a good book – no one ever thought it was going to be the kind of transaction where it is flooded from day one,” says one ECM official on the deal. “And yes it was sensitive, but it wasn’t one of those cases where the bottom of the range is obviously too expensive.”
Another banker at one of the leads goes further, commenting there was a surprising amount of interest in the book at strike.
However, going into the start of the second week of bookbuilding, Monday, October 24, some bankers were feeling nervous that the expected interest was not materializing – and were perplexed by the apparent lukewarm attitude of a buy side that had apparently seemed receptive before the deal.
“My reaction on the Monday afternoon and the Tuesday morning was, these other serious people that we thought were coming in, why are they not in yet?” says one.
“We knew it was going to be a tough trade, and early on the volume in the book was not substantial but it was good quality. If you have that quality in the book at an early stage, how can it not happen in the end?”
On the Wednesday the book was finally covered. By exactly how much is hard to tell – even off the record, bankers are reluctant to elaborate. Experience suggests this means it was just covered: anything else would surely have been reason for celebration.
An update was put out to the market that the book was covered at the base size and would close at 1pm on the Thursday.
ConvaTec, which closed flat on debut that same Wednesday, had got its books-covered message out just three days into its bookbuild. On Misys it had not come until nearly the end of the process, just like Biffa. And Biffa didn’t end well. Having been repriced during the bookbuild, it traded down on debut. Things were looking bleak for Misys.
The book was covered within the range, but there’s a difference between getting covered and working out. It doesn’t mean you are home and dry
Bankers often face a dilemma with such updates. If word gets around that the coverage level is low, the update can work against them if people who have already placed orders start to get cold feet. No one on the buy side is going to take comfort from thinking that a book might only be covered because they are in it.
“These kinds of updates are sometimes like someone suddenly telling you that you’re getting married tomorrow,” says one syndicate official. “You might start to think, I didn’t really think about this and I’m not sure I want to be in it after all.”
No one that Euromoney has spoken to has said categorically that orders were pulled at the last minute, but most agreed that there were plenty of nerves late on Wednesday about whether a deal could be done.
As anyone working in ECM knows, describing a book as covered can mean a lot of things. A book can easily be one captive private banking order away from not being covered, and plenty have priced off books that are a smidgeon over one times covered – just about acceptable when that coverage comprises rock-solid investor interest, although the aftermarket is still going to be dicey.
However, when dealing with a situation that is touch-and-go at best, absolute levels of coverage are meaningless compared to what is sometimes called “allocability”: can the stock be placed in a responsible way, with confidence about aftermarket performance?
For Misys, that was looking doubtful. “The book was covered within the range, but there’s a difference between getting covered and working out,” says another banker close to the deal. “It doesn’t mean you are home and dry.”
Indeed not. Following discussions on the Wednesday night, the company put out a message to the market on Thursday morning that the deal was not happening, stating: “Despite encouraging institutional support, Misys Group Limited has decided not to proceed with its potential initial public offering at the current time due to market conditions.”
The decision, when it came, was little surprise to bankers through the whole of the syndicate – but that didn’t make it easier for them to swallow.
“You’ve had months of work, from the owners, the company and the banks,” says one. “It’s horrible.”
What now? The market inevitably first moves on to the blame game, the usual circus of finger-pointing that follows failed trades.
“Just about everything, all the classic mistakes,” duly intones one senior banker when asked for his assessment of what went wrong. The difference with Misys, however, is the extraordinary range of factors cited by participants and observers as contributing to the deal’s fate.
They include: the buy side not grasping the investment case; confusion over the company’s reporting currency; the syndicate structure; the macro backdrop; other equity deals struggling; the time of year; the valuation; the change in deal size; the fact it had been listed before; Brexit; the US presidential election; a private equity firm paying itself with proceeds; a shaky outlook in the firm’s client sector; the quality of the book; the tight timeframe that shortened the preparatory period.
It’s a grim litany, enough to make any ECM banker question their career choice as they watch their debt colleagues expose themselves to market risk for a matter of hours rather than months.
But the timeframe is one factor that bankers repeatedly returned to: in hindsight there had simply not been enough time to get investors comfortable with the story. That exacerbated other existing issues: some say the deal shouldn’t have got bogged down in valuation, but it ended up being about that because when the buy side is not sufficiently informed, they fall back on the optics.
With so many potential reasons for failure, the timeframe is as good a place as any to start. Typically bankers would want to give potential IPO investors two rounds of ‘early look’. That’s when the key target buyer base is identified, the story is explained to them and – in an ideal world – a dialogue is entered into between buy side and sell side.
The purpose is not only to gauge initial interest levels, but also to iron out questions about the equity story ahead of the more formal roadshow. And it’s often only in the second round of such discussions that the key issues are thrashed out.
In the case of Misys, bankers say there was only time for one round of such consultations. They are divided on how significant that ended up being, but there is little doubt many felt it meant they and the buy side were going into the deal less prepared than they would have liked.
“I don’t think there was enough preparatory work, particularly given the questions that investors had,” says one senior ECM banker. “The thing is that investors were quite gung-ho about it at the start, but then when they got the stage of looking in more detail, they grew cold. In the end they couldn’t get comfortable with it.”
A banker at another firm on the deal agrees, noting gloomily that it was struggling all along because of that.
“I don’t think it ever really got off the ground,” he says. “Most IPOs have a couple of different educational phases. Stage one is ‘Do you understand and believe the forward plan?’. Stage two is ‘OK, what are you going to pay for that’.
“We never really got past stage one.”
Was it the story?
In that banker’s view – one shared by some others on the deal – everything else follows from there, but what was it that investors were being asked to grasp that appeared so difficult?
The initial rumoured valuation appeared to put the company close to highly valued peer Temenos, but feedback suggested to bankers that investors were likely to want it to come at a discount to the lower-valued Sage Group, the UK accounting software provider. That meant there was a disconnect from the outset.
The company had a positive story to tell of its progress since going private, but was asking for a lot of belief in its future plans, particularly its ability to deliver the growth it was now promising.
Assessing that revenue growth wasn’t helped by the company’s habit of changing its reporting currency. When previously listed, it reported in sterling. In private hands it switched to dollars. Before the IPO it changed to euros (its parent is Luxembourg-based), defending its decision on the basis that the biggest portion of its business (37%) is now in that currency.
It’s one thing to say we’ve lowered the price, but you have to remember that this was being anticipated as borderline FTSE 100. What eventually was on offer was nothing like that
- Syndicate banker
Few argued with the logic of that, but there was still some initial confusion around the currency changes – partly because the switch had the effect of boosting 2014-2016 growth rates. It was simply another challenge that investors had to get over.
As it was, the compound annual growth rate for revenues over the period was about 8%, although profits have risen faster. Misys said it was targeting revenue growth of 7% to 10% in the medium term, with a 20% to 30% net income dividend in 2017.
There’s no getting away from the fact its core customer base is challenged by tough conditions, regulatory pressure and continuing litigation risk that compels them to search for efficiencies and lower costs.
However, bankers argue that far from being a hindrance to its future plans, such conditions are a boon for Misys, as its solutions will help clients achieve those gains.
That’s still not the easiest sell.
“I wonder whether people just thought: ‘Banking software? You’re yanking my chain’,” says one banker away from the action.
“It was all a bit odd,” says another banker who didn’t work on Misys but was involved with the ConvaTec IPO. “The view on Misys seemed to be it was all guns blazing, it’s worth this, but then that didn’t seem to be backed up by soundings from investors.
“The feedback on our own deal was OK although very glass-half-empty, but we had done a lot of early-look marketing and pilot fishing. We were comfortable at the bottom of our range.”
For a banker who did work on Misys, the real killer was one word in particular. “If you see in any feedback the word ‘punchy’ in terms of management plans, then you are in trouble,” he says.
“When you go out and launch a management roadshow, you’ve got to have a feeling that the market not only believes your plan but thinks it is conservative. You can’t talk valuations and multiples if the guy on the other side thinks that it’s a stretch on the growth front. The conversation stops at that point.”
Ultimately the deal was a reminder that no matter how confident an issuer is of the value of its own story, if investors are struggling to get to the same place, success is tough.
“The market was not minded to accept that they should be valuing this off Temenos,” says an ECM banker at one of the leads. “That may not even have been wrong, but we just didn’t win over investors with it. And we were naive to think that we could.”
Misys also had to contend with having been previously listed. At first glance, that might seem like an advantage, and indeed it meant there was some familiarity with the name. But the company was pitching itself as transformed – and hence worth a different valuation.
Memories of its previous incarnation might gain you immediate recognition, but they also raise the challenge of explaining how things have now changed.
“The predictions for growth were quite rosy and the challenge was to counter questions over whether the company was really markedly different to before,” says one banker away from the deal. “That didn’t appear to be well understood.”
Those closer to the company argued this was not a determining factor of its fate. “That in itself would not have been enough to lead it to where it got to,” says a banker at one of the leads. “It’s much more about the market context.”
An ECM banker at another of the leads agrees that the fact investors were buying something back again that had been in the market before was not a big issue. “People recognised that management had done a lot of work with the business. With a bit more seasoning, would it have made a difference? I’m not sure. I don’t think the valuation actually mattered in the end.”
And there was a further factor around perceptions: the fact that the deal itself looked different to how it was first rumoured. Early valuations were not official, but some bankers argued that the trickle of information into the public domain had been unhelpful, in that it raised expectations of a bigger deal that then appeared to have been slashed when the bookbuilding range was announced.
With a smaller free-float than originally expected, the deal was of course smaller than it might have been. The original rumours were for enterprise value rather than equity value, and in reality there was no cut from an earlier size as the valuation is not official until the range is announced. But in some eyes, the damage was done.
“This was too much of a game changer I think,” says one syndicate banker. “It’s one thing to say we’ve lowered the price, but you have to remember that this was being anticipated as borderline FTSE 100. What eventually was on offer was nothing like that. The plan versus what was on offer were too far apart.”
Another banker argues that the index point was unimportant, appearing to ignore the fact that bankers have always routinely cited index inclusion – and the secondary market buying that it creates – as an important driver of primary interest in IPOs.
“Whether or not something is going to be in an index is not so important in an IPO – you won’t have that index money in the book. The extra overhang because the free-float was going to be 20% rather than 25% mattered, but not the index.”
Was it the market?
“What’s so wrong with markets?” Euromoney has heard the refrain several times in the course of these discussions, after Misys cited market conditions as a reason for pulling its deal. Markets are not in bad shape, but they are distorted. Short positions are tough to maintain because of the risk of being the wrong side of the latest central bank stimulus.
However, it’s not a market that people feel fundamentally good about – there is no conviction.
In such conditions, however, even bankers on the deal say that a decent story, properly explained, will be received well. “I think this was more company-specific,” says one. “It was quite an aggressive plan that was put forward – markets liked it but felt that it was quite aggressive.”
Another banker on the deal maintains that sentiment had moved throughout the process to such a point where the original plans became untenable.
“You have had a few deals where there has been a mismatch between what sellers’ price aspirations are and what people are prepared to pay in the current market conditions,” he says.
“You have some cases where deals struggled because the story didn’t resonate, like Biffa and PureGym, and then you have others, like Office First and Misys, where the price range that the vendor went out with initially was too high by the time the deal came to price.”
There’s no doubt that other deals in the market complicated the picture.
“You had a number of dynamics with other deals,” says a banker away from the Misys IPO. “Biffa got repriced and then failed to hold at the new price. The Nets IPO priced with apparently very high demand but then came off and was heavily stabilized, and then on the Friday you had Ahlsell, which traded up 20% in the aftermarket.
“There seems to be a new sentiment that isn’t helpful, that unless it is very cheap I’m not prepared to look at it.”
This tallies with the lack of conviction that other bankers speak of, and is understandable given the political uncertainty that still lies ahead in the form of Brexit and the US election, both factors that could reprice markets.
It also doesn’t help that at this time of year, when some active managers have had what some bankers describe as nothing short of a shocking 2016, investors are ultra-nervous of anything that looks like it could struggle to give them a quick pop of alpha. Passive money has done pretty well this year, but as ECM bankers tend to lament, that’s not the money that buys their deals.
“You can’t underestimate the dynamics in the broader market that are destabilizing the confidence of investment managers,” adds another banker on the deal. “You have moving bond yields, sell-offs in defensive stocks – all this stuff destabilizes.
“And these aren’t moves that are being driven by the active fund managers. These are basket trades, macro trades, heavyweight fund flow rotations, and they are catching people off guard.”
Aftermarket liquidity, or the lack of it, is also off-putting. One ECM head whose firm has analyzed the liquidity of IPOs in the first week tells Euromoney that average first-day liquidity for this year’s IPOs is about 25% to 30% of the deal size, but that this drops to about 5% by day two and just less than half of 1% by the end of the first week.
“If you are getting into these things, you have to be either fully positioned or out of it by day one,” he adds.
Was it the banks?
It’s not as if the bankers on the deal were unaware of the challenges they faced, even without the tight timeframe. Given that, how did the deal even end up going ahead? With so many firms working on the deal, how did the message not get through to the client that a deal was not possible right now, or not at this valuation?
Some point to the bloated syndicate, with its large number of bookrunners, and rattle off the usual criticism of such deals. “You should be going home each day thinking that you are on the hook for a deal working or not,” says one banker. “When you have so many banks, what can you worry about? After all, if it fails then all the top banks have failed, not just you.”
One senior banker away from the transaction argues that a large syndicate can create a situation where one individual bank will find it hard to be the outlier against its competitors if it has qualms about the feasibility of a deal. The result can be that everyone ends up pushing beyond the bounds of what is possible in a bid to please the client.
“There is something broken in the IPO process,” he says. “As night follows day, particularly with PE-owned assets, banks walk in and overpromise, and then there is a constant grind of disappointment to get round to reality. It’s 95% about starting the discussion in the right place.”
Other observers of the deal have similar views. “When you have lots of banks on the top line, it doesn’t instil confidence from a buyer’s perspective,” says another syndicate official. “It tends to lead to ‘yes men’ type stuff. Who’s going to put their head above the parapet? There’s isn’t a chance that’s going to happen.”
That’s easy mud to fling at a deal from the sidelines, of course, but even some of those working on the deal felt that it was not helped by the number of firms involved – albeit while stressing how much work their own team contributed.
And, ultimately, bankers reckon that cancellation of the deal, however ugly it seemed at the time, was probably the right decision rather than risking a secondary market calamity.
“It’s not helpful for the broader market to have something trade badly,” says one banker. “At least when something is pulled, investors haven’t actually lost money. Yes it’s another bad stat, but that has to be better.”
The most striking sense from all the discussions with bankers on the deal is of an over-riding helplessness at the situation they were facing, almost as if they were only tangentially involved. Some blame a collective lack of responsibility.
“It just becomes this slow motion thing that you don’t know how to stop,” says one. “I guess if there are only two banks in charge then it’s easier to have a proper discussion and say, look we’ve got this issue, and the only way to deal with it is this way.”
But perhaps fearing a return to the times of complaints about the UK IPO market from the likes of BlackRock – which infamously lambasted IPO banks in a letter in 2011, and again in 2014 – this same syndicate member argues that talk of whether the failure of a deal such as Misys has sinister implications misses the bigger picture.
“Look at ZTO, this parcel company that did its IPO in the US the other day,” he says. “The range was $16.50 to $18.50, it’s a blowout, prices at $19.50. Closes day one at $16.57. You can spend seven hours talking about Misys and what’s wrong about the IPO market in the UK, but the reality is that there are issues everywhere.”