A takeover bid of Panmure Gordon & Co. Plc by former Barclays CEO Bob Diamond's Atlas Merchant Capital LLC and Qatari investment fund QInvest LLC could be followed by a wave of consolidation in the broker-dealer space, as regulatory pressure makes it increasingly hard for small and midsize firms to remain competitive.
The board of Panmure Gordon, a London-based stockbroker and investment bank, said March 17 that it had accepted the offer, which valued the company at 100 pence per share, or about £15.5 million — a 68.1% premium to the March 16 closing share price of 59.5 pence.
New financial regulations such as the forthcoming MiFID II, due to come into effect in 2018, will create a drag on the profitability of midsize brokerage firms, according to David Buik, a market commentator at Panmure Gordon. In this environment, getting an injection of capital from an influential buyer is "the best thing that could have happened" to the brokerage.
"As a mid-sized broker, you need more capital to take on the likes of UBS Group AG and Goldman Sachs Group Inc. in their own back yard," he said in an interview. "Unless you have capital, and unless you increase your client base, you are going to struggle. The level of regulation at the moment is draconian."
MiFID II will impose tougher rules on brokerages with both trading and research models. Effectively, this will require brokers to "un-bundle" the services they provide to clients such as fund managers, separating out calls from analysts, conferences, research reports and access to management teams. Historically, brokers have simply provided all of these services to clients in one package, but under the new rules, the provision of research alongside the execution of trades could be classed as an inducement.
MiFID II will also significantly increase the level of disclosure and recording that brokers are required to carry out on trades in a bid to boost transparency, which will in turn impose additional costs.
The acquisition of Panmure Gordon could be "just the start" of a series of M&A in the brokerage market, as the implications of increased regulation start to bite, Buik said.
At a time when revenues from the traditional business of research and trading are likely to be constrained, the Atlas Merchant Capital and QInvest deal will provide Panmure Gordon with the kind of capital that it needs to branch into other, potentially more profitable segments of the market, another spokesperson for the latter said in an interview.
She confirmed that MiFID II is putting pressure on revenues, meaning the firm will have to diversify their income streams. It will look to eventually become a full-service bank, but no decisions have yet been made because the focus has been on getting the deal done, she said.
The deal will give the broker capital to acquire other businesses should opportunities arise, she added.
Panmure Gordon bought a stake in PrimeXtend Ltd., a new company that provides processing infrastructure for trading, in 2016. The deal involves a maximum investment of £2 million for a 49% shareholding in the company.
This deal is symbolic of the kind of growth that Panmure Gordon may make in the future now that it has the weight of Atlas Merchant Capital and Qinvest behind it, the spokesperson said.
As well as providing research and trading on behalf of retail and institutional clients, Panmure Gordon advises on IPOs for clients ranging from small to large-caps and also provides advice on M&A.
QInvest, which already holds about 43.43% of Panmure Gordon, is a unit of Qatar Islamic Bank (QPSC).