Mark Valentine not in Kernaghan merger
yet he is still with the company
Research Capital to merge with Thomson Kernaghan
$3B in customer assets
Sinclair Stewart
Financial Post 1/25/02
Research Capital Corp. has agreed to merge with rival brokerage Thomson Kernaghan & Co. in a bid to become one of Canada's largest independent investment dealers.
The new company, which will retain the Research Capital name, brings together two firms of roughly equal size with a combined $3-billion in customer assets and 180 retail advisors.
A spokesman for the companies said the marriage was driven by the need to devote greater resources to increasingly costly compliance practices and to invest more heavily in technology.
"You don't have to be a dummy to realize that Enron and the various Yorkton issues, the investing public and the regulatory agents are going to require firms to invest more in regulatory compliance," said Pat Howe. "I think part of where they're driving at is to get some more scale so that you can do more things and so that you can be more responsive to the marketplace."
Mr. Howe declined to offer details on the executive structure of the merged entity but confirmed that Mark Valentine, chairman of Thomson Kernaghan, will not join the company.
Instead, he will continue to oversee Thomson Kernaghan's Nasdaq trading operation, which is not being folded into the new structure and will now operate independently. Mr. Valentine could not be reached for comment.
Mr. Valentine, a youthful executive who joined Thomson Kernaghan in 1994, has witnessed his share of controversy at the firm over the past year. After his hedge funds tumbled during the market meltdown, unitholders began scrambling for redemptions at a pace the fund could not maintain. Other investors took the firm to court, while the Investment Dealers Association of Canada has launched an investigation into allegations money was taken out of a client's account without authorization.
"It's a weird mix," remarked one observer, who described Research Capital as a mainstream small-cap broker, while Thomson Kernaghan has a reputation of being more willing to dabble in speculative plays. "Who's who in the zoo is going to be interesting to watch."
Neither Patrick Walsh, chief executive of Research Capital, nor Lee Simpson, CEO of Thomson Kernaghan, could be reached for comment yesterday. In a joint statement, the two executives said they aimed to focus their efforts on "the under-served corporate mid-market" with a combination of private client, investment banking, research, and institutional sales and trading capabilities.
Peter Brown, chief executive of Canaccord Capital Corp., Canada's largest independent dealer with 673 licensed brokers, attributed the merger to the increasing market penetration of the country's five major banks, and suggested the dwindling numbers of privately owned shops could ultimately strangle the small-cap market.
Groome Capital Inc. and Rampart Securities Inc. were each swallowed last year by Desjardins Securities Inc., a subsidiary of the Mouvement des caisses Desjardins, Quebec's largest financial institution. Vancouver-based Goepel McDermid Inc. was purchased by U.S.-based Raymond James in 2000. Yorkton Securities Inc., in a rebuilding phase after ousting its chief executive and striking a settlement with securities regulators, is also said to be seeking an investment partner, although its principals have insisted they are not looking to sell the firm.
"It's marginalizing all these small retail firms and forcing consolidation and mergers. There may be too few participants to have a viable small-cap market in Canada," said Canaccord's Mr. Brown. "Complicating it also, and one of the barriers to entry, is the massively complex regulatory burden that has been created in Canada -- it's just a nightmare. Only big banks and big-cap companies can deal with that regulation."
Given that the markets have been slow to rebound from their doldrums this past fall, it does not appear that the pace of consolidation will ebb any time soon.
"It confirms what we predicted would happen," said Ian Russell, senior vice-president of capital markets at IDA. "The trend will continue toward further consolidation in the industry and it will continue for some time."
In a recent report, the IDA suggested many of its smaller members may be forced to sell or merge because of an economic downturn that has riven brokerage revenue and crimped profit margins. He pointed out that smaller firms with an emphasis on retail sales are particularly vulnerable when capital markets are weak, since they lack the scale to absorb significant fixed costs in such areas as compliance.
sstewart@nationalpost.com |
