MID-MARKET City brokers have had a tough recession, and it shows in a series of M&A deals reshaping the sector.
Two hit the spotlight for different reasons last week: Brewin Dolphin received much acclaim for selling its 55-man broking arm to Spanish investment manager N+1 for £5m, leaving it free to focus on its asset management business.
Seymour Pierce has been less fortunate: its £60m merger with Bermuda-based Gerova Financial Group looks shaky after Gerova was hit by management troubles. Chairman Keith Harris says the deal remains on track but it is understood that negotiations have stalled for the moment.
They are just the latest in a spate of M&A that has seen small brokerage firms being taken independent or becoming takeover targets. So what’s causing it?
The financial crisis has been a large part of the problem, as the brokers’ core work froze in the credit crunch and is only now starting to thaw.
“The volume of M&A, stock trading and capital fundraising has decreased significantly – so the sector has been suffering from overcapacity relative to demand, particularly within the mid-market,” one source close to Evolution Securities said.
Others put it more bluntly.
“There is a lot of talk about the market being overbroked – it is overbroked,” a source close to Peel Hunt said.
This has particularly hurt brokers focused on the AIM market, where the number of companies has fallen more than a third since 2007 from 1,347 to 946 in January this year, John Borgars, an analyst at Equity Development said.
“There has been a massive decline in the AIM market and that has put pressure on the brokers,” Borgars said.
The need to boost market share saw takeover attempts such as Evolution Securities’ courting of Panmure Gordon, which has recently struggled with losses.
For others, the solution to the challenging environment has been to move the business away from broking services.
For Brewin Dolphin, for example, selling its investment banking arm has allowed it not only to exit the crowded broking market but to refocus on investment management, an industry with steadier returns and fatter margins.
Several sources agreed that finance houses highly dependent on broking income could benefit from such a shift.
“Companies need to make a strategic change. There is a difference between changing your business strategically and just getting new financial backing,” one said. He was also sceptical that the current M&A would create a more consolidated market. “If anything the market has become more fragmented, not more consolidated,” he said, citing Lehman Brothers’ split into Nomura and Barclays.
Other brokers with specialist expertise have been snapped up by international banks. Execution Noble was bought by Espirito Santo Investment Bank in November to add emerging markets expertise and a London presence to the expanding Portuguese bank.
But with many mid-cap brokers either independently-owned or AIM-listed, the market remains ripe for further deals.
One source suggested that Arden Partners, an AIM-listed broker with strong links to markets such as India and a market capitalisation of about £13m, would make a good takeover target.
Altium Securities and Finncap were also named as successful and well-positioned candidates worth consideration.
Nick Finegold, now co-chief executive of Espirito Santo Investment Bank, said he believed smaller brokerages would eventually get drawn into bigger banks.
He said: “Smaller companies never see themselves as being very small for very long and they want access to the same range of competitive opportunities.”
It’s certainly all change in the mid-cap brokers market.