18:55, September 11 258 0 law.com

2017-09-11 18:55:04
A Tale of Two Law Firm IPOs

When Slater and Gordon became the world’s first publicly-listed law firm in 2007, it was supposed to herald a new era of law firm ownership.

Instead, a decade after its landmark initial public offering, the Australian personal injury and employment claims specialist’s business is in tatters, thanks to a disastrous acquisition and stifling regulatory reform in one of its core practice areas.

Having been bailed out by lenders to avoid a potential bankruptcy after racking up losses of almost $2 billion, Slater is currently in the midst of a comprehensive restructuring that will result in its U.K. business taken over by hedge funds.

Its decline has been swift and dramatic. In 2015, Slater’s market capitalization peaked at $2.25 billion. It is now just $19.6 million—a drop of almost 99 percent. (All figures in this article have been converted to U.S. dollars.)

But Slater’s struggles are not necessarily a sign that publicy-traded law firms are doomed to fail. While Slater has struggled, another publicly-traded firm has thrived. U.K.-based Gateley has seen massive growth since its IPO in 2015.

Then again, things looked promising for Slater at first. Indeed, Slater’s partners—not to mention its shareholders—might wonder how on earth the firm got to this point.

After heavy investor demand drove up its share price 40 percent on its first day of trading, Slater used the proceeds of its landmark initial public offering to finance a massive international acquisition spree, scooping up no fewer than 37 businesses throughout Australia and the United Kingdom.

Slater entered the U.K. market in 2012 after raising $64 million to fund its takeover of British firm Russell Jones & Walker and a handful of other personal injury practices. Those moves preceded a flurry of other deals, including a transformative $895 million acquisition of insurance company Quindell’s professional services arm in 2015, which established Slater as one of the largest insurance claims firms in Britain.

The firm’s revenue soared and further growth seemed inevitable. Managing director Andrew Grech was even named by The American Lawyer as one of the legal market’s top 50 industry innovators.

But having initially sought to “dominate” the U.K. market, as Grech put it at the time, Slater’s underperforming British business would instead bring the firm to the brink of collapse.

The first warning signs appeared in the summer of 2015, when, following an investigation by Australian regulators, the firm admitted an accounting error that resulted in it overstating its U.K. cash flows. The U.K.’s Financial Conduct Authority and Serious Fraud Office also launched investigations into the business and accounting practices at Quindell.

Slater’s shares then tanked following an unexpected announcement by the U.K. government that it planned to clamp down on personal injury claims—a core driver of the firm’s business. In a single day of frantic trading, the firm’s market value was slashed by half.

The firm was then forced to write-down more than $640 million of goodwill relating to its Quindell deal after the business, which now operates as Slater Gordon Solutions, struggled with low case resolution rates and delays in achieving settlements.

In early 2016, the firm announced that it had suffered a staggering net loss of $740 million during the last six months of the previous year. That’s more than the annual revenue of Cravath, Swaine & Moore—the Am Law 100′s 46th-largest firm by that metric. Slater’s statement to the Australian Stock Exchange, where its shares are listed, also revealed a net debt of more than half a billion dollars—just shy of the firm’s entire annual revenue at the time.

Shortly after the parlous results were announced, news broke that CEO Cath Evans had left the firm. Slater’s general counsel and company secretary, Moana Weir, then quit, just two months after taking up the role.

With the firm’s share price once again in freefall, Slater responded by undertaking a significant restructuring of its U.K. practice that has resulted in the closure of at least 18 of its offices in the country. The firm also was forced to agree to a $630 million debt refinancing deal with lenders to avert a potential bankruptcy filing. Aside from resetting its financial covenants, the refinancing also required the firm to report more frequently to lenders, and agree not to declare or pay any dividends.

This did little to improve the firm’s financial situation. Slater posted additional losses of $1.2 billion in 2016, which included yet another hefty U.K. write-down, with the firm’s total revenue plummeting by more than a third.

Earlier this summer, Grech was forced to step down as part of a recapitalization plan led by New York hedge fund Anchorage Capital Partners that will result in the firm’s entire management board being replaced. Slater’s U.K. business will also be spun-off into a new corporate entity that will be controlled by its senior lenders.

The embattled firm also paid $29 million to settle a series of shareholder class actions, including a $200 million claim led by Australian rival Maurice Blackburn. The hedge funds that bought Slater’s debt covered $3.2 million of the settlement, with the remaining payout drawn from the firm’s directors’ and senior officers’ liability insurance.One consultant told me that Slater’s travails might discourage other law firms from going public. (For U.S. law firms, regulatory restrictions mean this all remains a pipedream anyway, despite decades of debate on law firm ownership rules.)

That may be true, but to discount an IPO on the basis of Slater would be to overlook the successes of another listed law firm: Gateley.

Gateley has been transformed by its IPO in 2015, when it became the first U.K. law firm to go public.

It its first two years as a PLC, the firm’s revenue has increased 27 percent, while its pre-tax profit has risen by more than a third.

Like Slater, Gateley has used the proceeds of its listing, which raised $40 million and valued the Birmingham-based firm at more than $150 million, to build working capital and expand the business. (Traditional partnership law firms are effectively unable to retain any earnings at the end of each fiscal year. Except for any planned investments, all remaining profit—what The American Lawyer refers to in its Am Law 100 and Global 100 surveys as “net income”—is distributed among the equity partners in full.)

In addition to opening new offices and bringing in 26 lateral partner hires, Gateley has sought to acquire professional businesses that service the firm’s existing client base. Last year, Gateley paid $3.6 million for tax incentives advisory business Capitus Ltd, and acquired property consultancy Hamer Associates in a $2.7 million deal. The two businesses generated revenues during the last fiscal year of $1.6 million and $1.2 million—and added to the firm’s bottom line, according to filings made by Gateley to the London Stock Exchange (LSE), where its shares are listed.

Gateley is now on the hunt for other targets to further broaden its offering—particularly an HR consultancy, which would work alongside its employment law practice. (The firm is also seeking a replacement tie-up in Scotland, having split from its Scottish arm, HBJ, which has since merged with Addleshaw Goddard.)

The IPO hasn’t just helped transform Gateley’s business; it has been highly lucrative for the firm’s equity partners, too. They received a $33 million windfall when the firm first went public and earned an additional $8.5 million from selling their shares in the practice last year, with five board members pocketing more than $400,000 each by offloading stock. Partners aren’t the only ones to have benefited: Gateley has also introduced share schemes that are open to all employees, including support staff.

It hasn’t been entirely smooth sailing, however. In a statement to the LSE, Gateley finance director Neil Smith said that the firm’s Dubai office has lost over $650,000 in the past two years, despite a 10 percent increase in fee income.

The forced transparency and reporting requirement that goes along with a publicly traded firm is something that many traditional, partner-owned law firms would no doubt see as a significant downside to a public listing. Still, there’s no question that, for Gateley, its IPO has had an overwhelmingly positive impact on its business.

In a recent statement to investors, Gateley chair Nigel Payne said he was “not only delighted with the financial performance of the business, but also the significant progress we have made from being an LLP to a PLC.”

Gateley is proof that, if managed well, transformation from law firm to corporation can be a change for the better.