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Buying shares in small stockbrokers as M&A play – you must be mad

Tom Winnifrith
Thursday 14 June 2012

In today’s Daily Mail, Geoff Foster suggests here that pretty piss poor results from Walker Crips (WCW) suggest that trading across the sector is dire. Yes he is spot on. There are few IPOs, private investors are not trading actively and so revenues must be down. And as we all know, stockbrokers demand big pay packets and will not change that just because their employer is struggling. However why should this drive mergers as Geoff suggests.

Foster suggests that XCap (XCAP) and Alexander David (ADS)are both crying out for a bid. I would add to that list Daniel Stewart (DAN) and VSA Resources (VSA). But why should anyone actually pay cash for these businesses. Within any such firm there will be a handful of key staff who generate most of the income. The rest of the staff either do not was their face (so are not worth hiring) or are just cost centres ( which would be duplicated at any acquiring firm). If the firms mentioned above do run into trouble ( and I am not saying that any of them are in trouble (although Alexander David has always struck me as a particularly useless outfit which cannot hope for profitability and I cannot say that Daniel Stewart is exactly top tier) then the few good staff are eminently poachable. Stockbrokers are mercenary chaps and chapesses.

So would I buy shares in any of the small brokers hoping for M&A action. No way. In fact for the short portfolio I’d have a look at Alexander David, for starters. At the calendar year end liabilities exceeded current assets. Post year end it raised £350,000 but it suffered a Q1 cash outflow and it must have got worse since then. The directors said at December 31st that “ Cashflow forecasts prepared by the Directors indicate that the Group will be able to operate within its resources for the coming year assuming levels of income and expenditure remain consistent with current levels of activity.”. Well my guess is that activity levels have fallen. Nuff said. I cannot imagine life is much happier at Daniel Stewart, VSA etc. Incidentally If I had to go for a second one of this troupe to look at on the short tack it would be VSA.

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About Tom Winnifrith
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Tom Winnifrith is the editor of TomWinnifrith.com. When he is not harvesting olives in Greece, he is (planning to) raise goats in Wales.
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