NB: The author holds iSoft plc equity

Upon being told this scribe lives near Grenoble some people do a double take and reply, “What?! Cher-nobyl?” Much the same mystified why-would-you-want-to reaction takes place when people chance upon iSoft plc shareholders. Welcome to my world.

To sketch some context, iSoft is The Major Supplier of hospital software in the UK (60% of revenue) where they have no sizeable competitor. Earlier this year former management was caught cooking the books. The company has enjoyed bad press since, and carried the political can (partly justified) for implementation delays and gremlins on the largest non-military IT project the UK has seen. iSoft came close to financial death as a result, and is yet a hospital job.

Thanks in large part to its non-implicated, newish and well-connected Chairman (John Weston) it has put the beginnings of a survival platform in place. Nonetheless, long-term shareholders have been badly singed, and the firm needs to recapitalise its balance sheet in order to deleverage and stave off a liquidity crisis.

At today’s AGM permission will be sought to issue equity. It’s likely that before year-end iSoft will then either make a rights issue, an open offer, or some combination involving perhaps an open offer and a conditional placing.

The choice is important. Rights issues are typically followed in the UK by underperformance for up to five years. Open offers, contrastingly, enjoy outperformance.

Exhibit 1: Rights issue vs Open offers, ex post performance

Graphic from Ngatuni et al, p 43 (see sources, below)

It is tempting to conclude that the choice of financing determines the subsequent performance. In fact, the choice reflects the underlying context of the company; and this context drives ex-post performance. The “context factors” include such things as director’s interests, growth prospects, degree of financial distress, appetite for rights, anticipated use of funds and so on.

An isolated, financially distressed iSoft may not have enough shareholder support for anything other than an aggressively discounted rights issue, and the volatility of its equity supports this outcome. However, the company may not be as isolated as it seems. In this morning’s pre-AGM statement Mr Weston referred again to trade and financial company interest in iSoft. Gleacher Shacklock and Morgan Stanley have been appointed advisors and discussions are opening.

This might be interpreted as is a sign of confidence in the company’s inherent worth (most notably its install base/UK market share) and implies both non-shareholder investment demand and, possibly, eventual refinancing on gentler and more confident terms than some analysts anticipate.

On the other hand, it might not: what form the re-financing takes and who participates are, in the shorter term, crucial.

Sources: Ngatuni, Capstaff and Marshall, Long-term Performance Following Rights Issues and Open Offers in the UK (1986-1995); Kortewg and Renneboog, The Choice between Rights-Preserving Issue Methods, 2003; Armitage, The Proportion Underwritten and the Reaction to Share Issues, 2000.

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