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Sizing up consolidation

The merger talks between Inter-Alliance and Berkeley Berry Birch is in perfect tune with the City&#39s mantra for the listed IFA sector – consolidation, consolidation, consolidation.

The move is a clear res-ponse to investor impatience over the performance of the bigger Aim-listed advisory firms. Analysts and distribution consultants have for some time been arguing that listed IFAs need economies of scale to become profitable.

Durlacher analyst David Pannell says: “Consolidation has not happened in a serious way yet but if it does, it is potentially very interesting. This is the first concentrated attempt to put two listed IFAs together.”

The principal goal for listed IFAs which have had substantial provider investment in the last couple of years is cutting costs out of the business. Inter-Alliance chief executive Keith Carby has brought 92 individual businesses on to one plc platform at the company but performance on losses has not been as good as at BBB.

For the six months to June 2003, Inter-Alliance&#39s operating losses rose by 188 per cent to £14.7m from £5.1m for the same period in 2002. In the six months to September 2003, BBB cut its losses by 22 per cent to £3.8m from £4.9m for the same period in 2002.

Inter-Alliance has taken just under £60m of City cash to keep it solvent since 2002 so it is not surprising that Inter-Alliance is the name that is expected to be dropped.

Of the six life offices that have stakes in BBB, five also have stakes in Inter-Alliance. Another City source told Money Marketing that investors see two keys to profitability for these and the other big listed IFAs – increases in productivity and cost cuts.

Inter-Alliance and BBB are achieving the first of these but it is in the realm of cutting out expense that advances towards profit are expected. The City source says: “The industry is crying out for mass consolidation to give economies of scale and increase productivity. A merger between Inter-Alliance and BBB could lead to a cut of between 20-30 per cent of the overall cost base.”

These costs would come from needing only one head office, one compliance team and one back-office system for the new enlarged business that, with about 2,000 advisers, would rank fourth in terms of RI numbers behind Sesame, Bankhall and Tenet.

But many advisers say consolidation will not work because the very reason they became IFAs in the first place was because their individual enterprising abilities were being stifled by working in big organisations.

Hargreaves Lansdown chief executive Peter Har-greaves says: “About five years ago, people were saying that value depended on how many IFAs you had but I think that has been proved wrong. The cultures of the two firms do work together and clearly there is a huge critical mass there. But so far it has not been proven that increasing size works.

“Both firms probably need to get rid of the 30 per cent of their worst consultants. If a business is struggling, the last thing you want is to burden management time with a merger.”

The supporters of consolidation argue that Inter-Alliance advisers are alr-eady in a 1,200-plus RI firm and the difference between that and being in a 2,000 RI firm is negligible.

Pannell says: “This is the first concerted attempt to put together two firms to create a large IFA in a way that will give it scale and power but I am not convinced that this will come off. You have got two very strong personalities there and due diligence may reveal some interesting things.”

Both the lead players in this merger have come to positions of power through reversing into existing organisations. BBB chairman Cliff Lockyer founded network Berkeley Independent Associates in 1992 and reversed it into Berkeley Berry Birch in December 2001, becoming chief executive of the enlarged BBB in 2002. He also founded financial services software house Synaptic Systems in 1999.

His big plan for the IFA sector as a distribution force is to wrest the same control from its suppliers that the big supermarkets have taken from the farmers.

This is the logic that supports his vision of creating a distribution company worth £1bn in five years based on the Australian wrap model.

Carby stepped up from a non-executive position to become chairman and chief executive of Inter-Alliance in 2001 and it is his experience as one of the three founding directors of J Rothschild Assurance – where he helped build the company to over 1,300 staff with funds under management of almost £2bn before reversing it into St James&#39s Place Capital – that is generally credited with persuading life offices and City institutions to keep the company going.

It could be said that without the trust that investors have placed in Carby, Inter-Alliance might well have gone to the wall some time ago.

Neither Lockyer nor Carby are able to talk about the substance of the mer-ger until a decision is made on whether to go ahead or not. That decision is expected in March.

Both men are known for their direct and strong personalities and one of the biggest questions surrounding the merger will be how they get on as due diligence shows both parties what the other is likely to bring to the marriage.

Pannell says: “The question remains whether these two very strong personalities will be able to get on.I give the chances of this deal happening at 50 per cent because we do not know what will come out in due diligence.”

If the deal does go ahead, then will it act as a blueprint for further consolidation in the listed IFA sector? Will we see Millfield and Lighthouse merging next? A City source says: “Further consolidation has got to be expected. But if these two get together, it will be more attractive for others to join them rather than set up separate merged bodies.”

So last week&#39s announcement may mark the starting gun for a round of consolidation that could see the growth of a new giant in the listed IFA sector.

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