Bottom Line: Return of merger mania

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The Independent Online
IS Princedale, the small USM-quoted marketing consultancy, caught in a time warp? Plans to double its size with acquisitions outside its main area of expertise are reminiscent of merger mania, 1980s-style.

Princedale is paying pounds 7.65m for a road haulier and two plastics companies. At the same time it is reorganising its capital structure and holding a placing and open offer to help fund the purchases.

Two accountants, chairman and chief executive Stephen Bennett and finance director Michael Simson, brought in three years ago were part-funded by food company Hillsdown Holdings.

Hillsdown's stake in Princedale will be diluted to 20 per cent after this deal is completed.

The stated logic for the expansion is that marketing companies (cyclical) will complement the industrial companies (contra- cyclical), providing stability across the whole group in all economic climates. Marketing consultancy is certainly vulnerable to recession, but the same might be said for plastics moulding and road haulage.

Princedale's board is to be buttressed by the former chairman of Hillsdown, Sir Harry Solomon, and David Winterbottom, former chief executive of Evode prior to the takeover by Laporte earlier this year. Both men have plenty of experience of acquisition-led growth, provided they have learnt from past mistakes.

The shares were suspended at 2p yesterday but the capital reorganisation includes a 1-for-20 consolidation of shares so that the equivalent post-deal price is 40p. The placing and open offer price of 25p is therefore tempting but the problems of acquisition- led growth mean investors ought to think carefully before putting more cash into Princedale.

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