Hands up if you want to be sold

Brokers are back on the bid radar as the bullishness goes out of the sector. So who are the takeover prey?
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The Independent Online

What a difference a few months - and a stock market correction - can make. At the start of this year, the UK brokerage industry was abuzz with takeover speculation. Seemingly every firm was said to be involved in some type of deal, be it a merger, a flotation or the poaching of staff.

Since then a few deals have been done: Bridgewell Securities listed, Evolution bought Williams de Broë and Cenkos Securities announced plans to float. Other mooted deals, however, have failed to materialise. And with the sector's earnings season in full swing - Collins Stewart Tullett reports interim results tomorrow, Arbuthnot Banking (parent of Arbuthnot Securities) the day after - speculation is reaching fever pitch.

As one senior brokerage executive says: "You want a list of brokers for sale? I can give you a list: Bridgewell, Shore Capital [the equity markets business], Seymour Pierce, Execution, Cenkos."

All deny this except Execution, which declined to comment. However, while such talk may not be new, the reasons behind it are. In May, markets around the world suffered a downturn, and AIM, the London Stock Exchange's market for smaller companies and the lifeblood for these brokerage firms, was particularly hard-hit. Since then, AIM has failed to recover and is currently trading 20 per cent below its pre-blip levels. Listed stockbrokers have been similarly devalued.

Fewer companies are floating, and when they do, it is often for less money than they could have attracted just a few months ago. Which means lower fees. So the tap that turned on the brokers' growth spurt has suddenly been reduced to a steady drip while the number of firms fighting for business has remained the same.

"We are in a unique situation in the market in that now we have more boutiques than we have ever had," says Jeremy Grime, analyst at Altium Securities. "The market is overpopulated and needs a bit of a sort-out."

Every chief executive interviewed for this article agrees with the picture painted by Mr Grime, yet not one of them sees their own company as a target. In an industry populated by entrepreneurial and often brash personalities, the shakeout is certain to be contentious. In some quarters it has already started. Andy Stewart, boss of the recently formed Cenkos, last week publicly lambasted the strategy of his rival Evolution, from which he has poached several executives.

Across the sector, brokers that made their name bringing new companies to the market say they are diversifying into other areas, such as advisory work, secondary offerings and asset management.

"There are too many companies that have a highly IPO-driven business model," says Andrew Umbers, chief executive of Evolution. The degree to which many brokers rely on floats, he says, "is pretty unsustainable and quite unhealthy if you belong to those organisations or are an investor in those organisations".

A few names repeatedly crop up as takeover fodder. One is Bridgewell. Its shares have lost nearly a third of their value since it listed in June, and most employee options are said to be underwater, leading to what one rival called "a very unhappy ship".

Darren Ellis, finance director, acknowledges that Bridgewell"listed at the worst possible time", but says morale is fine. "That's the story that is running out there, but we have a variety of incentive schemes, not just [share] options." He concedes that the drop-off in floats is a challenge but says the firm's heritage is in mergers and acquisition advisory work, and that it is increasing its focus on secondary offerings.

Panmure Gordon is another broker believed vulnerable. Formerly owned by Lazard, it reversed into Durlacher, another stockbroker, last year, ending several years of ownership by large banks. Its cost base, 50 per cent of income in 2005, is among the highest in the sector and it generates margins that Altium's Mr Grime deems "sub-standard".

Questions linger about how it will fare as an independent group. "This is their first year without a big balance sheet behind them," says a rival executive. "They will find it quite chilly, I should think."

Regulation is also a factor that will force groups to get together. Next year, a European directive comes into effect that will increase the amount of cash institutional brokerages must keep on their balance sheet - in effect, an insurance policy. Currently they must have the equivalent of one quarter of three months of costs. This minimum will rise to 15 per cent of annual revenue. For some, especially small houses, this could be a big problem.

That requirement, and the flagging share prices, could tempt international banks such Macquarie, Bear Stearns and Bank of America, which were sniffing around earlier this year, into taking a second look.

And no doubt they will keep a sharp eye on Collins Stewart. The brokerage, led by City veteran Terry Smith, will tomorrow give details of plans, revealed earlier this year, to demerge its stockbroking business.

Mr Smith announced the move after talks to sell the entire group had broken down. Spun out, the brokerage arm would have an estimated value of £400m and be the largest in the sector. "[It] could be a catalyst for bidders to re-emerge," says Mr Grime. "Now that they willbe able to see a value on the screen, bidders will know the price they have to pay."

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