What if Slater & Gordon had not floated … The downside of going public … Restructuring already underway … Litigation defendants seizing on S&G’s vulnerability
When Justinian posed the proposition on Twitter a while back we got this dogmatic response from someone in far-flung Toronto:
“None of Slater’s troubles have anything to do with being a public company. None. Zero. Zilch.”
@JustinianNews @smh None of Slaters troubles have anything to do with being a public company. None. Zero. Zilch.
— Mitch Kowalski (@MEKowalski) February 29, 2016
Slater & Gordon certainly tried to reimagine legal services and in the process has come dangerously close to extinction. Maybe Mitch, from Canada, has some brilliant Cross Pollen advice up his sleeve.
In February S&G announced an interim loss close to $1 billion after writing down the value of its UK assets by almost $815 million. The company is now insolvent and in the hands of the banks.
Paying $1.4 billion cash for Quindell undoubtedly accounts for a large part of the problem, and that acquisition was the result of the pressure to constantly hunt for growth opportunities to keep hungry shareholders and markets well-fed and happy.
The law firm buying spree here and in the UK was possible because Slater & Gordon could make share and cash offers. In all it swallowed 48 law practices before the bubble burst. When the share price was nearly $8 there was no limit to the possibility of using shares to secure more debt to takeover the common law works as we know it.
Scale was the catch-cry, yet it is doubtful that there were any benefits to claimants from building scale by investing in systems.
Slaters’ shares are now hovering around 26 cents, the banks are now owed nearly $700 million, the most recent valuation for work in progress is $672 million and the market capitalisation is $91.6 million.
The hand-on-heart claim that, despite being a public company, the firm’s primary duties are to courts and its clients, is under more pressure than ever.
There is now a competing duty to get the cash in, to get cases finalised and settled quickly, rather than optimally. Banks don’t much care about duties to courts and clients.
Indeed, defendants now know Slaters’ vulnerability, and the ever-increasing need to turn work-in-progress into cash.
Business commentator Stephen Mayne has pointed out that things are not being helped by hard-nosed insurers in the UK, digging-in over a great pile of noise-induced hearing-loss claims the firm has on its books.
Mayne also wrote in Crikey that the firm is burning through $20 million a month and that he would be surprised if shares in S&G were still trading by the end of April.
It’s a tragedy for those lawyers at the firm who have seen hundreds of millions of dollars of their net worth flushed away.
He is likely to be the unofficial in-house liquidator who will oversee the break-up of the firm for the banks. Stephen Mayne says for employees of an old labour/Labor law firm to be working for the banks will be an unsettling experience.
The Australian operations must still be profitable but the UK is a different issue. The Law Society Gazette reported earlier this month that the future of offices in Bristol, Halifax, Newcastle and Liverpool is under discussion. There are also proposals to close personal injury departments in Birmingham and London.
This will allow the consolidation of major city offices and the closure of some regional offices.
The Derby office will close, with one staff member transferring to Sheffield, PI work is to cease at Preston, Wrexham and Chester, and the Ashton office also will shut.
The noise-induced hearing-loss work will cease at Aldershot, Blackpool and Liverpool and the Accident Claims Hotline is being sold.
Contrary to the view from Toronto, the company’s current problems can be traced to the float because public listing created an imperative to keep growing, to keep enlarging the profits, and to keep issuing shares and raising debt. It was impossible to stand still and this led to placing so many borrowed chips with Quindell, which was supposed to give S&G vertically integrated opportunities with things like go-to-woe motor claims and insurance outsourcing.
Without the Quindell purchase S&G would still be a going concern. Now it has to come up with an agreed plan with the banks by the end of the month. It could be a break-up, a debt for equity swap, or a variety of things in-between.
Of course, without public shareholders there would be no class action against the company. Maurice Blackburn is fortunate it didn’t get into bed with Slater & Gordon when it had a juicy officer on the table, although MB is now coming in for flak on its own account. See here and here
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