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I started my career working in the City of London for Clifford-Turner, which became Clifford Chance. We helped owner-managed companies go public. Some of those companies were ‘people businesses’—I recall a fast growth recruitment company and a niche public relations company. The City has always been sceptical of initial public offerings (IPOs) of companies whose ‘key assets go up and down in the lifts in the morning and evening’ as a City wag once quipped.
In the 1980s, Saatchi & Saatchi floated and was followed by a number of other advertising agencies. None did well but with one very notable exception. The ex-finance director of Saatchi, Martin Sorrell, took a small listed shell, Wire and Plastic Products plc (worth £3m in 1985), and over 30 years used it to create the world-leading advertising and marketing giant WPP, capitalised at £15bn. Sorrell was clearly a very shrewd and perceptive CEO and ‘consolidator’ of the industry in which he worked—not only could he strike good deals to buy creative, people-led business but he knew how to create a team to manage that creative talent while at the same time driving financial performance and winning the confidence of investors. A master tactician.
The acquisitive listed Australian personal injury specialist, Slater & Gordon, has shown how in a volume market (where efficiency is key) a business can grow using its shares as currency. Gateley operates in the very different mid-tier commercial services market but again one that benefits from efficient execution of legal work.
I worked for many years in Birmingham (where I was brought up) and I know most of the Gateley management team, two of whom are former colleagues. As a proud ‘Brummie’ it is great to see a Birmingham firm bold enough to lead the charge into post-Legal Services Act 2007 world.
The ability to raise ‘risk’ equity capital rather than relying on partners’ capital or bank debt—that will allow firms to be more adventurous and grow more quickly. Their listed paper will also allow them to make acquisitions. If their shares continue to be highly-rated they can buy a smaller law firm on a low multiple of profits and ‘magically’ create perceived value because of the higher multiple on which the shares of public companies typically trade.
Share incentives can more effectively be operated where shares are listed—the key employee can be locked in as the share value grows with the loss of value if they leave before options have vested or targets have been met.
Shares in small public companies are typically valued on the market’s appetite for capital growth. In a legal services market with significant opportunity for consolidation there is great opportunity—as Slater & Gordon have shown—to grow by acquisition. The Gateley team have shown they can grow by shrewd acquisition—they picked up a large part of Halliwells when it went under. However, that was opportunistic. The danger will be the temptation to make acquisitions of businesses that are not distressed. This will represent a significant cultural and operational challenge and one that must be faced under the scrutiny of a sceptical investing public if things do not go to plan.
Gateley has wisely positioned their shares as representing not just capital growth but as offering a good dividend yield. However, if the company hits rocky times and needs to cut its dividend then the share price will suffer. With 30% of the share capital in public hands, 30% of the profits that once went to the partners’ remuneration is now going to investors.
Sales of shares by retiring partners in five years’ time, when the lock-in imposed by the sponsor comes to an end, will be a key time. At that point, Gateley needs to be well down a growth path with lots of enthusiastic investors with an appetite to buy the shares. Sales of shares in small-cap companies without an exciting growth story can be very volatile and illiquid.
With net profits of only 5% of fees, margins are relatively low and if or when we hit another recession the business could be vulnerable without very tight cash management.
A succession plan for Michael Ward, the CEO of Gateley, (and other key solicitor/directors) will be fundamental.
Volume players (like Slater & Gordon) as they are not at risk of key ‘rainmakers’ leaving are well suited to listing. Another very suitable company is one that sets out to be a consolidator in a fragmented market. It will be very interesting to see if this is the strategy that Gateley is going to pursue—if so, the key will be wise acquisitions where they do not overpay, plus great post-sale integration.
Michael Ward is going to have to spend a good deal of his time managing relations with investors and potential investors. Doing so will be key if Gateley wants to raise further equity and/or make acquisitions using its listed paper. The financial performance of the company will be scrutinised every six months—so now there will be considerable accountability and public scrutiny where there was not before.
Listing is the route of choice for the most ambitious entrepreneurs. Andrew Grech of Slater & Gordon observed that his company thought about private equity as the route to achieve their ambitious growth plans but in the event decided to ‘cut out the middleman’ and go straight for a listing on the Australian stock market.
Gateley will be the first of a number of firms which go public but these will in the future, I expect, be earlier stage businesses than Gateley. For the established successful very big law firm there is no need to list. For the unsuccessful mid-tier no one would want to buy their shares. Within three years we will see at least two or three listed consolidators of small high street law firms.
Interviewed by Alex Heshmaty.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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