As noted in the WSJ Law Blog, on law.com’s legal blog watch , and by my good friend Larry Ribstein, the Australian law firm Slater & Gordon, a personal injury specialist firm with 21 branches in the country and over 20,000 clients, became the first publicly-traded law firm in the world yesterday when it listed on the Australian Stock Exchange.
And it had a pretty rich first-day "pop," opening at AUD$1.32 vs. the issue price of $1.00/share and closing up 40% at $1.40. The Times of London also reports on the move, reciting the received wisdom that:
"Observers in the UK suggest that the top City firms, including the “magic circle”, are unlikely to need to seek outside capital, at least in the short term. However, they expect the prospect of an IPO or private equity investment to prove attractive to those in the second tier, particularly firms specialising in highly commoditised, consumer-facing practice areas."
As for me, I believe this view may well be true in the short run, but is highly questionable in the long run. Moreover, I believe that once one or more "second tier" firms demonstrates aggressively what can be done on the competitive landscape with access to meaningful capital, other firms may lose their complacency. This is the simultaneously destructive and creative engine of capitalism.
Back to Slater & Gordon: The firm is up-front about where it sees its priorities’ being, and maximizing shareholder value is not first. Indeed, it’s not even second. According to the discussion of "risk factors" in the prospectus:
"Lawyers have a primary duty to the courts and a secondary duty to their clients. These duties are paramount given the nature of the Company’s business as an Incorporated Legal Practice. There could be circumstances in which the lawyers of Slater & Gordon are required to act in accordance with these duties and contrary to other corporate responsibilities and against the interests of Shareholders or the short-term profitability of the Company." […]
"To the extent that there is a conflict or potential conflict between those duties, that conflict shall be resolved as
follows:
• the duty to the Court will prevail over all other duties; and
• the duty to the client will prevail over the Company’s other corporate responsibilities and duty to shareholders."
Likewise, managing director Andrew Grech—who himself owns more than 14-million shares, making him worth nearly AUD$20-million, or about US$16-million—confirms those priorities. “I don’t think being able to operate your business sensibly means you have to sacrifice the quality of the professional work you do for your clients and the way you deliver those service to clients.”
Don’t these declarations and disclosures essentially answer the fear of the traditionalists that there can be no marriage between a professional, client-centric ethos, and outside investment? What S&G is saying, if I read them rightly in plain English, is that they know compromising ethical obligations to the court or to the client is the way of madness, and that they shall not go there. I’m unclear what more one could ask.
Well, you protest, one could ask that they not open themselves to the profit-maximizing expectations of the outside-investor cohort to begin with. How then are the plainly-disavowed interests of those passive third parties more powerful or motivating than the profit-maximizing desires of full equity partners in a private firm, who collectively distribute 100% of the spoils at year-end? If the problem, in other words, is the collision between "professionalism" and "profitability," I suggest Slater & Gordon has just ameliorated, not exacerbated, it.
The Australian Financial Review (the down-under equivalent of the Wall Street Journal) has the best coverage, not just reporting the facts of the offering, but extrapolating to other what other major Oz firms might be worth on comparable bases. (They appear to be using a P/E ratio of about 13, a figure also attributed to "a Sydney investment banker" as plausible. Slater & Gordon closed its first day of trading at P/E of about 12.5.)
Their analysis claims that each of the top five Australian firms would be worth at A$2-billion or more in market capitalization. For example, they value Freehills at A$2.65-billion, which equates to nearly A$13-million for each of its 209 equity partners. And, drolly, they have this to say: "While the major law firms have indicated they do not intend to float, the potential for a large windfall from listing on the ASX is likely to focus partners’ minds on the prospect." Indeed.
There’s more: Blake managing partner John Atkin is quoted as saying, inarguably, that "The partnership model is very unsophisticated… You have to pay the profits every year for tax reasons, which doesn’t encourage long-term investment or thinking—but that could be possible with a different structure" (emphasis mine). Thank you, Mr. Atkin, for stating the blindingly obvious—and something which we as a profession nevertheless seem to remain perfectly comfortable ignoring utterly. To compete the thought:
"Where else do you find organisations which run a businss as large as ours which are unincorproated, other than where there is a regulatory reason for doing so? The answer is none."
Freehills reportedly plans to incorporate next year, while Mallesons would like to follow suit if it can resolve certain tax issues.
But back to Slater & Gordon.
What will they do with the money? I ask only because one of the most common objections I hear when I propose that US law firms ought to have full access to the capital markets is: "Why do law firms need money? They’re not capital-intensive."
Indeed they’re not, at least compared with most industries. Law firms’ assets are not fixed, they’re "elevator assets." Yet that’s not to say creative initiatives couldn’t be undertaken if firms did have access to meaningful capital. (You may not know the answer to the question until you have the resources to actually pursue answers.)
As for Slater & Gordon, they intend to do several things with the money—$15.4-million specifically targeted for the following:
- Pursue acquisitions—perhaps the local Australian equivalent of a "roll-up" strategy for consolidating the personal injury/contingency bar nationwide.
- Invest in marketing.
- Strive to double or triple their client base (largely grown at retail, so capital helps).
I’ve read through the rest of the prospectus and it reads, at least to this securities lawyer, precisely as one would expect. They make the business case for the firm:
- Pointing out that the personal injury law firm market is highly fragmented, making it ripe for acquisitions;
- Disclosing that they received an impressive 30,000 potential new client inquiries last year;
- Reporting on a survey that shows they had over 80% brand-name recognition in their key market.
They also articulate the risk factors, including:
- The aforementioned loyalty to courts and clients ahead of shareholders;
- Reputational risk if fails to meet client expectations;
- Inability to complete its aggressive acquisition plans, or greater than expected competitive pressures;
- Over-reliance on key personnel;
- The competitiveness of the market for high quality lawyers;
- Potential changes in the regulatory environment;
- And so on.
Why do I list these?
Because they read like: Any Other Prospectus.
And that’s precisely the point, isn’t it? How truly extraordinary is the public listing of S&G? Not a bit. The story is that a nicely performing, fairly small firm, with a promising future but in an iffy industry, offered its shares on an exchange and the investment community responded with a one-day pop of 40%. They could be gone in a year or three or they could be a mid-pack, index performer or they could conceivably—though I would be the last to forecast this of a firm run by lawyers—be a shooting star. The most important point is simply that it happened, as a routine transaction on the Australian Exchange.
We have lost our virginity. Fine, done.
Now let’s try to learn what this is really all about.
