Business viewpoint - Pegasus set to choose own jockey

In a few short weeks, Pegasus has turned from dowdy spinster to belle of the ball.

In a few short weeks, Pegasus has turned from dowdy spinster to belle of the ball. The accountancy software vendor has smoked out three suitors - Australian-based Solution 6, Sage, and Internet start-up Freecom.net - and two firm proposals of marriage.

The highest offer on the table is from Freecom.net, which punted an all-share deal valuing Pegasus at £45.8m, or 658p per share. This topped the 430p per share cash offer from Solution 6 in December, which was recommended by the Pegasus board.

Solution 6 is mulling over whether to get involved in a bidding war with Freecom's highly-rated paper, while Sage has better things to do than bid in the teeth of fierce opposition from the Pegasus board. Besides, at Freecom.net's price, Pegasus would be poor value for Sage shareholders' money, the software giant says.

My guess is that Solution 6 would, in the short term, represent a better bet for Pegasus users and resellers, if not shareholders.

Solution 6 is a big accountancy software company in its own right, with a worldwide distribution network, and Pegasus would sit nicely within a bigger group.

Solution 6 will be loathe to see Pegasus slip from its grasp, believing it offers "substantial synergies". But not if Freecom.net gets its way.

Because it is an Internet start-up, Freecom.net attracts a high valuation, according to E-Trade. Its market capitalisation on 20 January was £122.33m, and it had only 12 employees (with more bodies by now).

For the 12 months ended 31 December, Freecom.net recorded turnover of £599,539 and a pre-tax loss of £1.95m. Cash balances at the end of the year were £19.11m. The pressure is on for Freecom.net to do a deal.

Freecom.net's chairman, Bob Morton, holds 13 per cent in Pegasus, so it can be assumed he knows the vendor. He has also said he will accept Freecom.net's offer. Surprise, surprise.

It can also be assumed that Freecom.net needs Pegasus more than Pegasus needs it, for the start-up deserves its Internet rating less than most.

In essence, the firm is a reseller for e-commerce software group Intershop, and helps its customers to build online Web stores.

Very laudable. One day it could be profitable, especially if it has backed the right e-commerce platform. But as a reseller, it is subject to competition from other resellers - long-term gross margins will go down.

Freecom.net fails one key test as an Internet stock: scalability. To increase turnover substantially, it has to recruit staff. The company also fails the Internet shovel test; the companies that supply the shovels will make the real money in this 21st century gold rush. Instead, Freecom.net is assembling the shovels supplied by others.

And what would I do if I were a Pegasus shareholder? That's a no-brainer: I'd take the Solution 6 money and re-invest it in Sage.