Software and services company Fidessa Group (LSE: FDSA) has soared 20% higher today after it became a possible bid target.
A statement was released by the firm to say that it is in advanced discussions regarding a possible all cash offer by Temenos. Under the terms, shareholders in Fidessa would receive £35.67 in cash for each share, plus the right to receive the final and special dividends announced by the company yesterday. In aggregate, they are worth £0.797 per share, which brings the total value of the possible offer to £36.467 per share.
Investment potential
Of course, there is no guarantee that a firm offer will be made for the stock. This may be why the company is trading slightly below the total offer value, with its price standing at around £35.50.
The offer appears to be relatively generous. It puts Fidessa on a price-to-earnings (P/E) ratio of around 36. This is relatively high, given that the company is forecast to grow its bottom line by just 4% this year and by a further 3% next year.
Certainly, it has the potential to generate higher growth rates in future years. Demand for its services continues to rise, and this could provide a boost to its overall growth rate. However, with it trading on a high valuation even before today’s announcement, it seems as though its investors would be getting a good deal if the offer comes to fruition.
Clearly, some investors may wish to cash in following the sharp rise in its share price. A bid may not be made, after all. Either way, it appears as though the stock lacks investment appeal at its current price and it may be prudent to sell up and invest elsewhere.
High valuation
Also offering a narrow margin of safety within the software and computer services sector is Computacenter (LSE: CCC). The company’s share price has risen by 40% during the course of the last year. This puts it on a P/E ratio of around 16.5. On its own, its rating is not prohibitively high. However, when the company’s forecasts are factored-in, its valuation seems difficult to justify.
In the current year, the business is expected to report a rise in earnings of just 3%, followed by the same rate of growth next year. This is around half the expected growth rate of the wider index and suggests that investors have become overly optimistic about the company’s prospects.
Certainly, Computacenter has a solid track record of earnings growth. It has been consistent in recent years, with its bottom line growing in four out of the last five. However, it is still priced as a growth stock, and its forecasts over the next couple of years indicate that it no longer fits into that category. As such, now could be the right time to avoid it and look elsewhere for better options.
