The sharemarket fizzle of Slater & Gordon and Shine … Finding a better ambulance to chase … What went wrong and why was it allowed to happen? … Will there be havoc? … Geoffrey Nettle the latest to express concern with the listed law firm model
Australia’s listed law firm model is in tatters, with the two biggest porkers on the block, Slater & Gordon and Shine, losing 80 to 90 percent of investors’ capital.
The Financial Review asked, “should law firms, which have avoided the sharemarket for centuries, ever become public companies”?
Knowing what we know now, and what we should have known then, the resounding answer is NO.
Law firms as public companies were waved through in 2007 when Steve Mark was head of the office of the NSW Legal Services Commissioner – just one of a number of poor decisions during his reign as LSC.
It caught on in England where alternative business structures have been permitted since 2011, and in Scotland.
Many other places haven’t swallowed the idea that non-lawyers should own lawyers, including the USA (except DC), Canada, Hong Kong and New Zealand.
The latest to express concern is the High Court’s Geoffrey Nettle who told the new silks at the recent ABA dinner in Canberra that the extra pressure of lawyers working for public companies was undesirable, as were were the inherent conflicts of interest where both clients and shareholders have to be accommodated.
Nettle won’t make his speech public, but that is the gist of what he said, as reported by Tony Boyd in the AFR.
The Chanticleer columnist says that S&G and Shine are now facing uncertain futures. He even mentioned “collapse”, as in:
“One of the liabilities at Slaters that will be difficult to handle in the event of collapse is the off-balance sheet funding that has been used to pay for legal actions.
This funding is unsecured and may not be recoverable if financial solvency issues affected the law firm.”
The insolvency ramifications are serious because few other firms have the capital to take over their case load.
The ABC’s finance reporter Stephen Long wrote, late last year:
“If Slater and Gordon were to go broke, the implications would be dire. It is one of the largest plaintiff law firms in the world.
A collapse would place thousands of clients in limbo, and potentially create havoc for the legal systems of Australia and the United Kingdom, where Slater & Gordon has expanded aggressively in recent times.
It would also be an ignominious and ironic end to a law firm with a proud labour movement history.”
S&G’s half yearly accounts are due to be published at the end of this month and will include hefty write-downs to the work in progress, which at June 30 last year stood at $825 million.
The company failed to release its gross operating cash flows for the six months to December 31, an undertaking it made as recently as mid-December. The profit guidance is also delayed.
Shine has halved its profit outlook for the 2016 financial year and has written off $17.5 million worth of work in progress, i.e. cases that aren’t going anywhere.
The driver for the market-driven model is earnings growth by acquisitions, fired by share price. It’s a process of “multiple arbitrage” – using high valuations to buy the earnings of smaller firms on lower valuations.
The mechanism entails the industrialisation of personal injury claims accompanied by large amounts of PR and marketing to urge the punters through the door.
You can see most of S&G’s acquisitions in Australia and Britain here. It had also made eyewatering offers (unsuccessfully) to acquire Maurice Blackburn, as had Shine. For its part Maurice Blackburn later decided it would not go public – an inspired decision.
Once the music stops when the share price falls, acquisitions falter, requiring new capital raising and debt and therefore more pressure on the balance sheet.
Work in progress lingers longer than it should on the books, resulting in piles of work recorded as assets that are worthless.
In April last year, the most recent time we were in touch with S&G’s top banana, Andrew Grech, he was full of PR beans.
“Every month the Slater and Gordon staff newsletter includes a section for ‘thank you’ letters from our clients.
This month the ‘thank you’ section included photos of flowers and cards, as well as hand written messages from clients expressing their appreciation for the service and support that they received from our lawyers and support staff.”
Grech claimed that public listing enabled the firm to invest in new services, technology, more offices and pro bono work – actually all the things that are possible for any well managed sizeable law firm that isn’t a public company.
In April 2015 S&G’s shares were trading at $8.07 just after it purchased the professional services division of Quindell in the UK for $1.2 billion.
Quindell is an insurance claims company with a bit of a strange history. Originally, it was the management company for the Skylark Golf and Country Club. It listed in 2011 for £33 million and acquired a collection of small companies to become a one-stop shop for insurers and insurance claims processing. By 2014 it had a market capitalisation of £2.5 billion.
Grech described the acquisition as a “transformative transaction” for the firm. He reported that the purchase would make S&G the clear leader in the UK personal injury business, with estimated market share of 12 percent – “more than double the size of our nearest competitor”.
The world seemed to be Grech’s lobster as he declared Slater & Gordon would have about 200,000 clients at any one time in the UK (increasing from 40,000).
However, at the time of the purchase it was known that Quindell’s accounting practices were suspect. PwC said they were “aggressive [and] unacceptable”, yet this did not deter Slaters who ploughed ahead with its ears back, declaring that it had done a comprehensive due diligence.
By June 6, 2015 Slater’s shares had dropped to $5.06 after the UK corporate regulator announced an investigation into Quindell’s finances.
The company restated its 2014 profit of £175 million to a loss of £133.2 million.
This was due to a classic over-estimation of WIP – booking too much anticipated revenue from industrial deafness claims.
June 29, 2015, S&G’s shares went to $3.78 after it admitted mistakes in reported results from its UK operations in 2012-1014. ASIC says it’s investigating.
August 6, 2015, the shares trade at $3.17 after Quindell reported a loss of £795 for the year.
Three months later Pitcher Partners is replaced as the law company’s auditors by Ernst & Young, while the CFO’s job is shifted from Wayne Brown to Bryce Houghton.
By November Slater’s shares were $0.94 after the UK government’s budget announcement of measures that will tighten eligibility for accident compensation, in an effort to reduce the cost of motor insurance.
Slater & Gordon said this would not be a problem and that the government’s policy had been anticipated.
The shares are now around $0.64 and Slaters has said it is considering the feasibility of two of its UK offices.
At the end of last month the The Telegraph (UK) published a scathing article that commenced:
“For a bunch of ambulance-chasing lawyers, you might expect the legal brains at Slater & Gordon to know a car crash when they saw one.”
Needless to say, the banks and the class action buzzards are circling. See recent announcements by S&G here.
NAB and Westpac have appointed McGrathNicol to go through Slater’s books.
Which takes us back to the original point – about the desirability of public, market-driven investments in law firms.
Regardless of how the prospectus may prioritise the obligations to courts, clients, and investors, there is a tension imposed by the market. The business has to maximise returns so that the share price can leverage new acquisitions, new WIP and a brighter future for those looking for a home for their capital.
Not that law firms, for many years, haven’t seen themselves as businesses. It’s just that with a listed entity clients are now more akin to customers and high flying shares have the effect of infusing the operation with the intoxicating whiff of greed.