View from City Road: Can Smiths keep the pot boiling?

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The Independent Online
First reaction to Smith New Court's profits thriller yesterday was: 'How did they do it?' The second was: 'Why are Rothschilds reducing their stake?'

The first has much to do with the firm's audacious approach to risk- taking in its jobbing business. The achievement of making a cool pounds 36m in the second half alone must win Smiths the title of one of Britain's most successful securities houses.

Indeed, after the Big Bang morass Smiths' progress should put heart into anyone who wants to see thriving independent firms in the City rather than a bunch of grey transatlantic monoliths.

So why has Rothschild shown its hand by reducing its stake via the rights issue? The view from the dealing room last night was that Rothschild had signalled that it was slowly on the way out of its decade-old relationship with Smiths.

The explanation from Rothschild is that from the time it bought the stake it has wanted to co-operate with Smiths in certain areas through being the largest single shareholder. But it did not want to take up the rights and thereby risk having to make a full bid.

The reduction enables Smiths to add to its share register and generally keeps everyone happy. But it also prompts a third question: Where does Smiths go from here?

Smiths would say that it is perfectly happy steering its profitable present course. But can even such a successful firm remain independent in this age of global markets?

Indeed, the very risk-taking at which Smiths excels could be its undoing. Despite its protestations that the juicy profits in the second half came from a wide variety of transactions throughout the business, it confirmed the view of many that Smiths is the leading British punter.

If it gets it right, it is rolling in it. But if it gets it wrong, what price independence then?

Several US investment banks have been mooted as possible partners for Smiths, usually with a Morgan in the name, but it is hard to see a firm with such a strong cultural identity fitting comfortably into a larger, more bureaucratic organisation.

And it would be a sad day for the City to see one its few post-Big Bang successes submerged. Whereas many other institituions went for the slogan 'big is best' and attempted to be all things to all people, Smiths stuck to its strengths and won through - for the moment at least.

Perhaps Smiths can best be compared to a high wire act - exciting, daring, drawing 'oohs' and 'ahhs' from the crowd below. Everyone wants it to carry on defying gravity, but there is also the fear at the back of people's minds that it may slip and fall. High rewards tend to follow high risks.