After an initial flurry of interest in the public markets following the IPO of uber-acquisitive Slater & Gordon, way back in 2007, law firm listings have been few and far between. A handful – Gately, Keystone, Gordon Dadds and Knights – are trading on AIM. But no firm has taken the plunge on the main market. Until now.
DWF’s £95m IPO this month – a deal which values the business at £366m and is not only providing a healthy windfall for its equity partners but is also arming the firm with a £10m war chest, specifically for investment in IT and its managed services programme – marks a watershed moment in the relationship between law and the public markets. But will DWF’s move precipitate a new wave of IPO activity or is the window of opportunity already swinging shut?
The appeal of the public markets is clear – creating a capital event for partners who have built equity in the business, creating an opportunity to incentivise and lock in employees through share options, access to funds to drive M&A activity and, of course, to invest in differentiating technology.
“The partnership model that has worked for centuries is starting to look outdated,” Dominic Morley, head of corporate advisory and broking at Panmure Gordon, which worked on the Keystone IPO tells Legal IT Insider: “Small and mid-size firms below the Silver Circle may look to or need to consolidate, which will change much of the industry. Going public can help fund growth and acquisitions.
“A public listing gives a law firm access to capital and a quoted currency to participate in consolidation,” Morley adds. “If a firm is public, its shares become a currency with a defined – if variable – value. Shares can also help recruit – a firm can offer stock bonuses rather than a far-off promise of possibly becoming a partner.”
Conventional wisdom would suggest that firms with low numbers of partners, highly processed services and limited reliance on partner / client relationships will be best suited for flotation. However, according to Pete Dawson, national head of transaction advisory services at Grant Thornton UK, this hasn’t been the case.
“If you look at what has actually happened, providing the law firm has a robust business, a strong business plan, clear growth strategy and a sound reason to float, then the opportunity is there,” he says.
However, there are also challenges and the public markets won’t work for everyone. “Regulation is an issue, especially for those with overseas operations,” says Dawson. “Participation in global networks pre- and post-float could potentially be a challenge. The financial reporting requirements of a listed business may not sit well with some law firms. There is also the factor of some loss of control, which won’t suit everyone.”
In addition, succession can be a challenge if a firm removes the “carrot” of becoming a partner, Morley adds. That can be mitigated by offering bonuses and share options. But there are concerns that some law firms may use an IPO primarily to benefit the current generation of partners, leaving later generations with external investors to service through profit growth, which will only be possible if significant proceeds from the IPO are re-invested. DWF has appeased investor concerns with its commitment to drive value through technology but the markets will be wary of firms looking only to drive wealth.
Furthermore, investor appetite for law firms is not unlimited. As a first mover, DWF has secured one of a finite number of spots on the public market.
“The market has a very large appetite for good investments. It’s all about the attractiveness of the opportunity,” says Dawson. “Having said that, investors like to have balanced portfolios, so once they have a reasonable exposure to the legal sector they may well become more picky.”
“Yes, we think there will be more legal IPOs, but we think this will be measured,” adds Morley. “There is more appetite from investors for publicly listed law firms, but the market will look to invest in firms with differentiated business models. We might see one or two new entrants but the market will not have endless appetite for more IPOs of very similar businesses.
“Investors want to back a firm that will use its listing to drive shareholder value,” he adds. “If investors think the partners are just cashing out there will be little appetite to buy that firm’s shares. Once there are a number of comparable listed law firms investors can be more choosy. They won’t want to invest in more of the same.”
By Legal IT Insider contributing editor Amy Carroll
This article first appeared in the March Orange Rag – sign up for your monthly free copy here: http://legaltechnology.com//latest-newsletter/