Law firms going public: the pros and cons21/09/2017
A Stairway to Heaven or Highway to Hell? McCarthy Dennings’ Richard Beresford examines the pros and cons of law firms floating on AIM.
Last month, law firm Gordon Dadds was acquired by AIM-listed shell Work Group plc by way of a reverse takeover and joined Gatelely PLC on the UK public markets. This has triggered speculation as to whether other law firms are likely to follow suit. Is the public markets option a Stairway to Heaven for ambitious law firms or a potential Highway to Hell?
Dadds is frequently described as the second listed UK law firm, the other being the highly successful Gateley. Overlooked are the rather less successful examples of Quindell, which ended up selling part of its Australian-listed law firm, Slater and Gordon, with rather disastrous consequences for the buyer, and AIM-listed Fairpoint Group (owner of Simpson Millar) which recently went into administration. The travails of these firms may give some cause to pause for thought.
Being on the market exposes law firms, which are by their very nature coy about their inner workings and financial affairs, to intense scrutiny and a pressure to perform. So what are the upsides? Both Gateley and Dadds have ambitious growth plans. Dadds has already grown from £2.5 million turnover in 2013 to an impressive £25 million in 2017 and says it sees the opportunity post-listing to act as a consolidator of law firms and, like Gateley, Gadds wants to buy non-legal, but complimentary businesses. Having access to cash from the market and the ability to use its shares as acquisition currency might well facilitate all three of those ambitions. The money raised when it
came to the market is also being used to pay down some of the debt it has taken on to fuel its growth to date. Since listing, Gateley has been on the acquisition trail and seen share its market cap and share price grow considerably.
A listing can also increase credibility and raises profile as well creating alternative ways to incentivise employees and get their “buy-in” through share schemes, increasingly important in today’s mobile labour market.
Inevitably, more law firms will follow suit and they are likely to be from the squeezed middle firms from outside the magic circle. Those firms are under pressure to restructure to compete with their larger neighbours (and avoid the fate of the erstwhile SJ Berwin which went into administration at the beginning of the year). Mid-sized firms lack the financial resources to invest in, e.g. near-shoring, which a significant number of bigger City firms are able to take advantage of. Midsize firms are struggling to maintain access to their existing debt funding, let alone take on more to allow them to shed jobs and move to a lower cost base while also making much-needed investments in IT. Merger is one answer and the route recently taken by City firms Nabarro, Olswang and Cameron McKenna. That is likely to be the most popular option although not without difficulties – law firms are notoriously tricky to integrate.
Others will look for outside sources of funding, including the public markets. However, markets are only interested in businesses able to demonstrate significant historical growth, strong financial performance and a clear strategy to capitalise on their new status. Listing means an upheaval in pay structures and corporate governance. Some of the profit previously distributed to the partners now needs to be made available to shareholders. Partners who were previously consulted on major decisions will have to adjust to control from a CEO. Not all firms can pull those cultural shifts off. Gateley had the advantage of being controlled by a small number of equity partners and Gordon Dadds already operated a model which aligned remuneration to client work and rainmaking. Neither has lock-steps that favour time-servers and the old guard. They also have strong, visionary leadership with clear strategies and big ambitions. How many other law firms can say the same?