Derek Pain: It never pays to be sentimental about shares

No Pain, No Gain

I suspect many buy-and-hold private investors are lumbered with a few dead shares. They should have been sold many moons ago but for one reason or another have remained in situ and are now something of an embarrassment. Probably their only value is that the loss they represent can be offset in capital gains calculations.

Corporate manoeuvres have often reduced such shareholdings to a mere handful of shares. And selling a hundred or so penny shares, once allowance is made for dealings fees, will actually cost hard cash. Even so, tax considerations can make such an exercise marginally tolerable.

One of my share skeletons is a communications group operating from Austria under the rather British name Scotty. I never intended to invest in such a remote business, and my stake is the result of sentimentality and stupidity. Fifteen years ago I participated in the flotation of a videophone business called Motion Media. Subsequently, in the madness, the shares climbed, if I recall correctly, to around £29 against a 67.5p issue price. Then came a capital restructuring. I did not achieve the equivalent of £29 but I sold two-thirds of my holding at a handsome profit and a year or so later disposed of almost all my remaining shares at another good price but, rather unwisely, kept a token 1,000 for old times' sake.

Scotty acquired Motion Media in 2004. Since then the Austrian operations have become dominant with much of the old videophone business sold. Although still a British company, Scotty is essentially a European venture. It is profitable but could suffer in the current cost-cutting climate. Capitalisation is less than £1.3m.

My 1,000 shares, following another capital restructuring, have been reduced to 20. With Scotty down to around 6p my interest is hardly worth bothering about, particularly as my tax return will not require offsets. Maybe, when my portfolio is wound up, my humble 20 will come in useful.

Changes at Scotty are, however, afoot. Nearly a year ago, it said a bidder could be hovering. In the event, no offer appeared but an approach to buy the trading interests has materialised. The deal would leave the company as a shell with around £1.25m in the bank. Another proposal lurks if the sale does not go ahead. A director, Dr Ernst Wustinger, is prepared to pump up to £500,000 into the company, buying shares at between 8p and 9p. As part of the arrangement, Scotty would give up English residence and become a European company, It would, at least initially, be listed on AIM and the third market in Vienna but, ultimately, with its interests almost exclusively concentrated in Austria, the AIM membership would lapse. By putting all its eggs in an Austrian basket, it is hoped the group would return to "sustained profitability", but retiring chairman Lord Trefgarne acknowledges that "this route may be less attractive to some of its private UK shareholders".

Whether compensation will be offered to British shareholders is not mentioned. Nor is the position of those with tiny stakes. There is always the possibility that Scotty could adopt the policy of obliterating shareholdings below a certain level. The board, seemingly with some reluctance, supports the disposal and will ask shareholders at a meeting next week to approve the sale talks, although another get-together will be held to accept terms. If the sale does not go ahead, shareholders will need to approve the Wustinger proposal. The doctor does not support the sale of the trading assets.

Scotty's stock-market performance has been lamentable. The shares were already in retreat before the Austrian connection was forged. Still, three years ago they were above 100p. In the past year they have been as high as 24p. My discomfort is clearly accentuated by capital changes. Often such manoeuvres, as well as takeovers that are made up of a mixture of cash and shares, whittle down what were once reasonably sized stakes, creating obvious problems.

If my interest had not been so dramatically diluted, I would have probably arranged my escaped. My sentimentality in keeping a modest involvement has proved expensive. I'm afraid many small shareholders are inclined to fall in love with shares and lack the hard-headed approach of fund managers and professional traders.