The announcement that Collins Stewart, the FTSE 250 stockbroker, has been approached by a potential acquirer comes during a period when financial stresses and falling share prices have made the broking industry vulnerable to outside buyers.
Well-funded predators from Asia and the Pacific region are sniffing round UK stockbrokers, large and small, looking for ways to enter the market. The likely bidders for Collins Stewart include Australia’s Macquarie, Religare of India and Nomura of Japan.
Macquarie looked at several British brokers a few years ago; Nomura talked briefly to Collins Stewart late last year; and Religare bought a much smaller broker, Hitchens Harrison, in March and was in talks with Arden Partners.
Ordinarily, buying a stockbroking business can be risky. Their chief assets are people and relationships, which can walk out the door. For an established firm looking to grow, it is usually cheaper to poach individuals than pay a premium for the name on the door.
Outsiders can be an exception to this rule, because they may find it attractive to pick up licences, computer systems and an established client base in one move.
“It can take two or three years to start from a blank piece of paper,” said Andy Stewart, who founded the stockbroking group Cenkos. With an acquisition, “you’re buying into the [UK] corporate world”.
But even outsiders are wary of overpaying. They are mindful of the last big round of financial services consolidation when US, European and Japanese groups bought up a series of UK investment banks at what were later considered to be too-high prices. There are also cautionary tales about trying to integrate groups with different cultures and nationalities.
The current economic climate has taken a heavy toll on stockbrokers’ client bases and profits. With fewer companies coming to Aim, brokers have seen sharp falls in their advisory revenue and fierce competition for stockbroking clients. Collins Stewart fell from first to third among Aim stockbrokers in the last Hemscott Aim Adviser rankings after losing 11 clients.
But share prices now reflect the sector’s woes, so fear of overpaying may be less of an issue. Collins Stewart’s 76¼p share price at Tuesday’s close, before the possible approach was announced, was two-thirds lower than last summer and less than half its level at the time of the Nomura talks.
Collins Stewart is due to report results on Tuesday for the half year to June 30. Its share price started rising Wednesday morning, and rose dramatically after the afternoon announcement of the potential approach. The shares closed at 100p, up 31 per cent. The company is trading on a price/earnings ratio of about four times, while most similar rivals are closer to five.
The Collins Stewart talks come just a week after its former stablemate, inter-dealer broker Tullett Prebon, acknowledged it was discussing a combination with US rival GFI.
Both are led by Terry Smith, who serves as chief executive of Tullett and chairman of Collins Stewart. However, sources familiar with the companies said the timing was coincidental and had more to do with market conditions than any larger plan by Mr Smith to change businesses or move on.