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Winners and losers in merger

The proposed merger of Inter-Alliance and Berkeley Berry Birch is potentially very significant.

The headline figures are impressive. The combined company would have 2,000 advisers, bringing it to within a whisker of Tenet&#39s number three slot.

With revenues of £100m, it would have real clout with providers and, with a market capitalisation of £50m-plus, it would be sufficiently big to get noticed on the stockmarket.

From a business point of view, the merger would be sensible. BBB has a good network in Berkeley Independent Advisers but its national has not succeeded. Inter-Alliance brings a slightly tattered national and a small non-regulated offering.

No one knows what the future shape of the IFA sector will be. However, the combination of Inter-Alliance&#39s national and BBB&#39s network means it can adapt to future changes in the industry. This makes it better positioned strategically than firms such as Sesame.

More broadly, the merger is sensible for the IFA sector. We have argued for some time that consolidation is needed to create a smaller number of firms. Bigger firms should be more profitable, for example, by negotiating better terms with providers.

The lack of profits in the industry is a serious weakness and means that there will be more IFAs going into receivership. Profits will also make the sector attractive to investors so they will be willing to provider capital for investment.

In our view, BBB and IA come to the merger from positions of weakness. At 26p, BBB&#39s share price is stagnant and unlikely to recover to the 74p level at which it last raised cash.

Reaching profitability is taking longer than we expected and may not happen until the late spring. Finally, it remains essentially a network with an unsuccessful national.

Inter-Alliance is in an even weaker position. It has suffered from the loss of advisers since its two cash crises in 2003 and credibility issues. The business lost £24m in 2003, pre-redundancy and restructuring costs.

With further restructuring under way, we have concerns that IA will run out of cash.On its own, it cannot return to the capital markets so a merger is a logical strategy.

We estimate the chances of the merger being completed are no more than 50/50. The consummation of proposed mergers in the sector is low.

Cliff Lockyer and Keith Carby are both high-profile personalities with clear views on the industry. There is always the possibility that they will disagree. Most proposed mer-gers fail because management cannot agree roles or have differences over strategy.

Due diligence by accountants and lawyers will need to be thorough. In particular, both sides need to ensure that there are no black holes or unknown misselling. They will also need reassurance that the financial accounts give an accurate view on historic performance.

Finally, the loss of advisers from either business could destabilise the deal. The stockmarket announcement implies that BBB will take over IA, which may not be acceptable to IA advisers.

It is too early to estimate the financial attractiveness of a merged business. In theory, cost savings should be significant. However, these will not be easy to capture because some costs, such as office lease commitments,cannot be cancelled.

The initial response of the stockmarket was positive but not ecstatic. This is because much can go wrong and the shape of the new business is as yet unclear. The entry of a third party bidding for Inter-Alliance would spice up the situation. However, we consider this unlikely.

The main losers from the merger are smaller IFAs. There are numerous firms with revenues of less than £20m which want to float, often because they need cash to acquire other IFAs.

In the future, we believe investors&#39 focus will be on bigger firms of 500-plus advisers. Therefore, the current stockmarket funding drought for small advisers will continue.

•Perspective, p26


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