Do megamergers really add value — or are they, as their critics claim, just the ego satisfiers of chief executives, encouraged by fee-seeking bankers, advisers and PR practitioners?
Looking at the history of many of the small-cap favourites I hold in my own portfolio, judicious acquisitions have played a big role in their development.
When I first bought into James Fisher, it was an operator of small coastal oil tankers based at Barrow-in-Furness, Cumbria. That was in 2000, when its shares were hovering around 70p. Sixteen years later they are at £15.50 and the marine services and specialist engineering group is capitalised at £750m.
Fisher is a classic example of a business cleverly built by bolt-on acquisitions. Although not without blemish — an early foray into cable laying vessels proved costly — most acquisitions have been successful, focusing on underwater technologies in the defence and energy sectors. Very recent purchases include Liverpool-based Hughes Marine Engineering, providing commercial diving and civil engineering services to underwater projects, and Singapore-based Lexmar, a specialist provider of service and support for diving equipment and saturated diving systems.
Fisher has also built considerable expertise in the area of nuclear technology. A leader in remote handling, it sent a robot to Japan to help with the Fukushima accident clean-up. Under a £60m contract with Magnox, it will decommission the largest of the reactor cores constructed on the site in Winfrith, Dorset.
In all, two-thirds of group revenues come from outside the UK and a 21-year record of rising dividends continues. Fisher’s interim dividend was increased a further 10 per cent this week. I am still aboard, though regretfully over the years I took profits — something I now eschew.
Many of my other small-cap holdings make purchases from time to time, using their existing corporate structure to take out duplicated costs in the acquired business and develop new cross-selling and marketing opportunities. Generally shareholders welcome acquisition activity provided it is sensibly priced and not too frequent, allowing for proper integration.
In July, insurance services group Charles Taylor acquired Cega, a provider of technical medical assistance and travel claims management services. This followed the acquisition last December of a stake in Fadata, a niche provider of software solutions to the global insurance industry. Between them, these purchases have nearly accounted for the proceeds of a 2015 rights issue to which I subscribed at 155p — current price 280p.
In August, publisher Quarto acquired the US-based Becker & Mayer, which has a significant position in children’s publishing, a field Quarto is keen to expand into further. Following this purchase, 45 per cent of total group revenues are US derived. It was pleasing to see chief executive Marcus Leaver adding to his shareholding very recently.
I became a shareholder in Gooch & Housego, a photonics and laser specialist, in 2004 at just over £1 per share, building up my holding after visiting its historical Ilminster site. Today, after a recent post-Brexit surge, its shares have reached £10.50 — a pleasing “tenbagger”. Two recent “bolt-ons” are part of the growth story: North Wales-based Kent Periscopes, which makes periscopes as well as sights for armoured fighting vehicles, and Wisconsin-based Alfalight, a maker of laser-based optical systems.
Finally to an old friend, Air Partner. As a shareholder of many years standing I have experienced considerable mid-air turbulence in its share price, though it has always remained cash positive, with an excellent record of rising dividends. Its core business consists of chartering aircraft when large numbers of people need to be flown in or out of specific locations: for instance, when a carmaker was launching a new vehicle it used the company to fly 15,000 people to a European city.
Two acquisitions last year — Cabot Aviation and air safety consultancy Baines Simmons — have broadened Air Partner’s activities and have brought more stability to earnings. An encouraging pre-close interim trading statement effectively forecasting a 36 per cent advance in profits has driven the share price well north of £4.
My feeling is that we are seeing with Air Partner an early-stage replication of the James Fisher story, although whether there are as many aircraft-related acquisition opportunities as there are in marine services remains to be seen. This time, though, I am determined my shareholding will remain intact for the duration of the journey.
John Lee is an active private investor and author of “How to Make a Million — Slowly”. He is a shareholder in all the companies mentioned
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