IT’S out of the frying pan and into the fire for Isoft, the troubled software firm. Last year the discovery of long-standing accounting irregularities sent its share price tumbling and led to a management clear-out. A new team under John Weston, the former BAE Systems boss, who was installed first as nonexecutive and now executive chairman, has done its best to right the ship.

A big part of the job was to find a buyer, and Weston thought he had done so in the shape of IBA, an Australian software house. It made an agreed (but all-paper) offer that valued the UK firm at about £140m. But as its shareholders have found to their cost, at Isoft things are rarely straightforward. Its largest piece of business (15%-20% of sales) is as a subcontractor to CSC, the US group, on the ambitious IT revamp at the NHS. Under the contract, CSC has the right to block a sale of Isoft if it feels it has good cause.

No problems there, Isoft thought. And as the FT revealed, CSC’s European boss wrote to Weston in April saying there was no reason why the sale should not go ahead, subject to a couple of conditions.

But last week CSC changed its tune, saying it planned to block the deal. Oh dear. IBA’s share price dropped, and with it the value of the takeover.

BACKGROUND

• ISoft merger back on course

• CSC prepared to offer cash for iSoft

• CSC 'to counterbid for iSoft' says NHS supplier

• Problems at Isoft are far from over

• Sparks fly between ISoft and CSC

ISoft comment: The hardline

ISoft is considering legal action against CSC over its attempt to block a sale to IBA. Read the comment here.

Related Internet Links

• ISoft company information

• ISoft share price chart

• ISoft forecasts

On Friday night, in an announcement made after the market closed, Isoft said it would start legal action against CSC, claiming the Americans had not yet given proper reason for the change of heart. Isoft also said CSC had been in talks with Gores, a private-equity group, about a rival bid, which, if true, would obviously make it in CSC’s interest for the IBA offer to fail. CSC declined to comment yesterday, beyond saying the smooth running of the NHS contract was its priority.

It’s a murky situation, and a tricky one to call for shareholders. Three outcomes are possible. Isoft could succeed in its legal fight and the IBA deal would be back on. IBA’s bid could fall over, and Isoft could find another bidder – perhaps CSC itself, or a private-equity house. Finally Isoft could try to go it alone, meaning Weston would have to secure new banking facilities. The current ones run out in November, but the company doesn’t have that RBS
MOST of the top banking analysts are unable to publish research on Royal Bank of Scotland (RBS) because of conflicts of interest in the bid battle for ABN Amro, the Dutch bank.

One house that is able to do so is Execution Research, and if you believe its verdict, shares in RBS are a one-way bet.

In a note called “Win-win”, circulated to clients late last week, it said RBS shares were “undervalued in every outcome”. The broker has set a fair value of 835p on the shares, compared with Friday’s closing price of 632p.

Execution says if the bank’s bid for ABN fails, the shares will rebound. If it succeeds, the synergies created by the takeover will lead to a rerating.

But the broker’s enthusiasm for the stock has yet to rub off on institutional fund managers. RBS’s shares have been under constant pressure since it decided to launch a counterbid, but for those with an appetite for risk, this could be an opportune time to move in. long – they would have to be sorted out so the company could say it was still a going concern at the annual results next month – although that deadline could slip by a month.

At the moment the third outcome looks the least likely, but Isoft’s encouraging recent progress, revealed in its trading update in April, shows that at least it does now have a chance of stitching together a deal to stay independent. But in the meantime there will be some fun and games with CSC.

The shares closed the week at 45p, down 11.3%.

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