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City View: Small firms are still overlooked.

A six-fold increase in the number of small quoted companies going private last year highlights one inescapable fact. With the major institutions focusing on the big players, companies with a market cap of under pounds 50 million are going to have to look elsewhere to realise shareholder value.

The irrational exuberance displayed last year in the City towards technology stocks and, latterly pharmaceuticals and telecoms, has led to a situation where the share prices for many companies in these sectors bear little or no relation to financial perf ormance.

Among the Small Cap companies, however, it is clear that good quality businesses are being punished just as much as poor quality ones. In fact, precious little attention is paid to the quality of earnings at all. If a company is small, that's bad news fo r the institutional investor, it seems, irrespective of performance.

The West Midlands saw more than its fair share of buyouts last year, hardly surprising since the region's engineering and manufacturing strengths have fallen woefully out of favour.

According to Close Brothers Corporate Finance, the factors behind the expansion of public to private transactions last year remain in place.

If you look at the sectors which dominated the UK market last year, just two stayed the course.

The FT All Share telecoms sector rose 89 per cent in the year to the end of November, while the All Share pharmaceutical sector increased 38 per cent.

The sort of valuations attached to many of these stocks look pretty questionable, particularly when you consider there are now companies in or near the FTSE-100 Index that have never made a penny in profit.

Mr John Llewellyn Lloyd, chief executive of Close Brothers Corporate Finance, has attacked what he sees as institutional sizeism, where ratings in small companies are depressed merely because of the organisation's size.

His belief is that more company directors will look to take their businesses private this year because the alternative means they will fail to deliver the sort of return that shareholders expect.

Looking beyond the Small Cap sector, ratings are still relatively cheap and it seems likely overseas buyers will continue their forays into the UK.

This, and an increased number of UK companies looking for greater shareholder value, means it is likely to be a busy year in corporate finance.
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Author:Dresser, Guy
Publication:The Birmingham Post (England)
Date:Jan 5, 1999
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