Regulars & Comment

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.