Small Talk: Durlacher shareholders should question merger

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The Independent Online
DURLACHER shareholders aren't really going to agree this proposal to merge with Panmure Gordon, are they?

The long-awaited combination of the two stockbrokers was unveiled last week with a few surprising details. Panmure's current owner, Lazard, and Durlacher's existing shareholders will each hold a one-third stake in the bigger company, suggesting that they have agreed that Panmure's value is equivalent to that of pre-merger Durlacher. The other third will be given to the employees.

The ability to incentivise staff with equity is, of course, one of the great benefits of a stock market listing, but it is hard to imagine circumstances where it is acceptable to give away new shares equivalent to half the agreed value of the company.

As far as Durlacher shareholders are concerned, their business will be worth twice as much but with three times as many shares in issue. Unless you believe that the combination of Durlacher and Panmure will immediately create a new powerhouse in British broking (the reality is more modest), then you have to bet that Durlacher shares will fall steeply on their return from suspension.

And then there are the details of the deal that are yet to be publicised. Most intriguingly, just how will that one-third of employee shares be split? Every member of staff has been promised equity, but senior management will get more.

The companies say that there has not been a final decision on the split, but the rumour is that the top four executives (Richard Wyatt and Tim Linacre from Panmure and Simon and Julian Hirst from Durlacher) will share 25 of the 33 per cent. If that turns out to be anything close to the truth, then it really ought to be questioned by shareholders. The granting of large numbers of free shares to members of Durlacher management gives them a strong incentive to pursue this deal over any other that might emerge.

And that is the final area of interest. On the same day last week, Teather & Greenwood - another of the City's small stockbrokers - was taken over at a racy valuation. This is already shaping up as a year of consolidation in the stockbroking sector, where business is returning to healthy levels. With its pounds 49m of tax losses and a handful of successful flotations recently behind it (NETeller and DAT, for example), Durlacher could well be in the sights of potential predators.

The company needs 75 per cent of its shareholders to agree to the merger with Panmure. It is a high hurdle for a poor deal.

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