Across the pond, we’re about to see an actual experiment that heretofore
could only have been a thought experiment: Thanks to the "Clementi
Commission," non-lawyer third parties will now be able to invest in
law firms—most dramatically, law firms could even go public through
IPO’s.
Before we can become sullied by actual experience with this newly-opened
door, then, it’s a matter of some urgency to forecast what it might
mean.
A not-insubstantial school of thought holds, predictably, that essentially
nothing will change. Proponents of this view have more than sheer
tradition on their side; for example:
- law firms are not intrinsically capital-intensive;
- to the extent they do need capital, any decently-run firm generates
enough cash from operations to fund typical requirements handily;
and - third-party owners of "the wrong sort" could conceivably be viewed
as posing apparent conflicts of interest with specific clients (for
example, what if Goldman Sachs bought a large chunk of Shearman
& Sterling, which traditionally has been a "go-to" firm for Morgan
Stanley?).
Also, law firms in general—even the Magic Circle firms and the
AmLaw 25—still remain creatures of economic cycles, with little
guaranteed recurring income and the ever-present risk of stars checking
out along with their client rosters, so they do not meet the classic
profile of an attractive buy & hold investment.
But once you look beyond the BigLaw marketplace, different business
models could surely evolve, serving clienteles other than the Fortune
1000:
- The H&R Block model, serving individuals with elementary, simple
problems through walk-in locations. - The Bank of America/Wachovia/Washington Mutual model, offering
a slightly longer menu of services and hoping to establish "one stop
shopping" customer relationships for all one’s financial (read: legal)
needs. - The Smith Barney/Merrill Lynch model, with highly personalized
service for wealthy indviduals and small business, backed by national
research and branding.
Not only do these strike me as more than plausible, each is far more
capital-intensive than a conventional law firm—in other words,
candidates for public listing.
Let’s end by batting away a non-issue: The claim that one can’t
put a market price on a law firm. Of course one can, using the
familiar tools of financial analysis including the recent growth trends
in revenue and cash flow, the strength and composition of the balance
sheet, the dispersion or concentration of the clientele and the practice
areas, lawyer and staff turnover, etc.
Only one thing can
be said for sure at this point: Now that the Clementi door is
open, some firm is sure to walk through it.
