The takeover battle for accountancy software group Solution 6, yesterday received an all-share offer from Sage, which had been considering a bid, has pulled out of the race. All four companies operate in the fashionable applications service provider - ASP - sector which allows small and medium-sized enterprises to create virtual online business through rented software.

Freecom.net's offer represents a 49% premium to the price Pegasus shares were trading at prior to the announcement of the offer from rival Solution 6.

Freecom.net said it was con fident of success. However, market sources believe Pegasus may seek either a cash sweetener from Freecom.net, or even a white knight.

Freecom.net's offer has secured the support of Southwind, Mr Morton's family trust, which owns 12.7% of Pegasus. The rest of Pegasus's shares are split between institutions, none of which own more than 12%.

"This is a very exciting merger," Mr Morton said. "Both companies have similar target markets and the synergies are compelling."

Freecom.net said it had spoken to Pegasus about a merger twice before, but the talks had come to nothing. Pegasus called on its shareholders to wait for Freecom's offer to be published and a response to be sent to them before deciding whether to sell.

Separately, Freecom.net announced a pre-tax loss of £1.9m on a turnover of £600,000 for its maiden end of year results to December 31. Pegasus shares closed up 32p at 562p; Freecom.net dropped back 4p to 325p.