Regulars & Com­ment

Financial Mail - Investors Monthly - - Contents - MARC HASENFUSS email Marc on hasen­fussm@times­me­dia.co.za

Pity the small caps

SPARE A THOUGHT for the small­cap com­pany in­vestor who watches help­lessly as the dream of ex­plo­sive growth evap­o­rates in the harsh light of cor­po­rate re­al­ity.

There is noth­ing worse than find­ing that high-con­vic­tion small cap that has been per­sis­tently over­looked by the mar­ket, stu­diously ac­cu­mu­lat­ing stock at rea­son­able prices and just when you have col­lected a de­cent pile of scrip . . . bang, some­one pitches a buy­out of­fer and wants to take the busi­ness pri­vate.

This month I have my fair share of mis­sives from miffed mi­nor­ity share­hold­ers in se­cu­rity tech­nol­ogy com­pany Amal­ga­mated Elec­tronic Corp (Amecor). It is sub­ject to a takeover of­fer from in­vest­ment com­pany Stellar Cap­i­tal Part­ners, and share­hold­ers can elect to re­ceive Stellar scrip, a cash pay­out of 380c/share or a com­bi­na­tion of cash and pa­per.

I would not swap the sweetly po­si­tioned Amecor for Stellar — at least not at this del­i­cate junc­ture of the lat­ter’s cor­po­rate devel­op­ment.

The cash set­tle­ment is not overly gen­er­ous, and I would be dis­in­clined to sell out of cash-spin­ning Amecor at less than 450c/share. A num­ber of smaller share­hold­ers may share this sen­ti­ment. But Amecor’s big­ger share­hold­ers, rep­re­sent­ing 65% of the is­sued shares, are back­ing Stellar’s ad­vance.

Again we wit­ness the un­for­tu­nate but in­evitable dif­fer­ence be­tween the goals of larger pro­fes­sional share­hold­ers and hope­ful smaller share­hold­ers. But not for a mo­ment can you be­grudge spe­cial­ist in­vestors such as West­brooke Cap­i­tal Man­age­ment, well-heeled in­di­vid­u­als such as Wil­liam Kirsch or se­nior Amecor ex­ec­u­tives for back­ing the Stellar play.

I think the re­al­i­sa­tion is that Amecor, de­spite be­ing a feisty lit­tle con­tender, lacks crit­i­cal mass. Deal-mak­ing is essen­tial to bulk up the se­cu­rity tech­nol­ogy offering to a level where in­sti­tu­tional in­vestors start tak­ing note.

Stellar has the bal­ance sheet and deal­mak­ing skills (in the form of Charles Pettit) to build Amecor. It also has an as­set, tech­nol­ogy man­u­fac­turer Tel­lumat, that of­fers an op­por­tu­nity for man­u­fac­tur­ing ef­fi­cien­cies.

Per­haps enough mi­nor­ity re­sis­tance could per­suade Stellar to al­low mi­nori­ties to stay in­vested in an un­listed Amecor? Stellar has of­fered such an op­tion to share­hold­ers in Pre­scient in terms of re­main­ing on board the un­listed fi­nan­cial ser­vices busi­ness that is be­ing ac­quired.

I sus­pect most mi­nori­ties will be­grudg­ingly let go of Amecor. Then be­gins the task of find­ing the next sure thing. While I’m too much of a re­al­ist to en­ter­tain sky-high ex­pec­ta­tions, in­vestors will­ing to peer into the more ob­scure corners of the JSE for a “re­place­ment” for Amecor might want to crunch the num­bers at Sil­ver­bridge, In­d­e­quity, CSG Hold­ings, Deneb, Nu-World Hold­ings and ENX Group.

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