Going public

Law firms could soon list on the stock exchange. The Lawyer assesses the prospects of five UK practices to see whether the move would make good financial sense

The nearest thing to a publicly listed law firm in the UK has just made its latest acquisition. The patent and trademark practice Murgitroyd & Company, which floated on AIM in November 2001, bought Fitzpatricks Group, a Glasgow-based provider of patent and trademark services, on Friday 30 June for £1.3m.

The acquisition is tiny and Murgitroyd itself is still a small company, with a current market capitalisation of £21.7m. But the significance of the deal is potentially much greater than its monetary value.

A new market is beckoning. Perhaps from as early as next year, a UK law firm will be free to list its shares on the stock exchange. Or it could sell off a portion of the business to a private equity house, although the external control issues that would raise may rule it out. The post-Clementi, post-Legal Services Bill world is approaching fast, and the performances of other professional services businesses that have already taken the step of going public are the only indicators by which the success or failure of any future law firm plc can be measured.

The fact that Murgitroyd remains on the acquisition trail (the Fitzpatricks deal is its third in five years, following the purchase of David WJ Castle & Co and that of Cabinet Bonneau) and that its market cap has more than doubled (its shares have mushroomed from 121p to around 260p at press time) since its listing should be encouragement for any pro-listers in the legal market.

UK independent investment bank Noble Group advised Murgitroyd on its float on AIM in November 2001. Noble director Alasdair Robinson says there are obvious parallels between Murgitroyd’s IPO and a prospective float of a law firm. “Murgitroyd was a very stable and strong business,” he points out. “It had a similar fee profile to law firms with a lot of recurring income supplemented by project income. There’s nothing to say that, once the law changes, a law firm couldn’t float.”

Among a growing group of investment bankers, brokers and more forward-thinking lawyers, the question is rapidly changing from ‘could a firm float?’, to ‘which will be the first?’.

We do the hard work…

As regular readers will be aware, we at The Lawyer like to do our bit to help out the legal profession whenever we can. So rather than wait for next year, we thought we would beat the brokers to it and run through the mechanics of a hypothetical law firm float for five hand-picked firms. Saving hundreds of thousands in advisers’ costs, we have analysed these firms and come up with a valuation for each.

The mini prospectuses we have prepared for each firm offer more detail on our valuations of these firms, including their trading histories, market position and core business. Addleshaw Goddard, Berwin Leighton Paisner, DLA Piper Rudnick Gray Cary, Shoosmiths and Halliwells, there is no need to thank us.

The lucky five were chosen after we canvassed investment bankers, management consultants and accountants (not forgetting partners in law firms) as to which firms they thought would make the most attractive investment opportunities and why. Rather than name names, most advisers were happier describing the profile of the kinds of firms they believed were most likely to float.

“The key thing is diversification of revenue sources,” says Close Brothers’ Mark Barrow, who heads its private equity coverage group. “If you have a substantial single client or concentration of clients in a given area, that will probably be less attractive than a firm with a very diversified one. You’d look for about 10 different revenue streams on different cycles.”

Another banker claims that there are only two things the market will care about when valuing a law firm – “market position and growth potential”.

According to another, the track record will be fundamental. “People will want to analyse what happens in a downturn,” he says. “How quickly can you fire people or cut costs to keep profit up? How sustainable is the business?”
In fact, all of the above will be key factors in determining the value of a law firm if and when it comes to market. Valuing any business is a notoriously tricky game, but putting a price on the first law firm to float will literally be unprecedented.

Former Panmure Gordon banker Julian Hirst, who set out his stall as an advocate of this emerging market last year when he wrote to all of the top 100 managing partners to assess their interest in a deal, believes he has at least identified the kind of firm that is most likely to float. Since his letter, Hirst claims to have made presentations to around 20 firms and says he has whittled his shortlist down to a handful of potential green-lighters. “There are probably two or three looking at it seriously, maybe five,” he adds. “The likelihood is that two will go sometime next year.”

It is unlikely one of the UK’s big four – Allen & Overy, Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters – would want a deal. Simply put, they do not need to. As Robinson at Noble puts it: “They have enough capital to satisfy expansion requirements.”

In addition, the magic circle’s multijurisdictional nature would add another layer of complication to an already complex transaction.

So what are the clues to look for when trying to pinpoint the firm that will blaze this trail? A UK-only, or predominantly UK-based, firm that may be seeking funds for overseas expansion is a better bet. According to Hirst, it is likely to be one with a turnover of at least £50m and it would be focused on high-margin corporate and commercial matters.

However, others exploring this market believe that a more likely candidate would be a provider of bulk services, such as conveyancing or personal injury. In addition, a firm that has already converted to limited-liability partnership (LLP) status could, at least in theory, be further down the road to a deal in terms of the rigour it has already introduced in terms of financial reporting.

Why float?

The fact that firms will be free to float soon does not, of course, answer a more fundamental question: why? And more personally, why would an individual partner want to? An IPO would create enormous upheaval in any firm looking to raise funds in this way and would expose a bunch of naturally conservative lawyers to the glare of the public gaze. There would need to be a fairly compelling reason to start this ball rolling.

Money is, of course, the answer, but the crucial point is what the firm plans to do with the extra funds it raises by going to market. Is the idea to give the current partners the funds and freedom to go off and buy a bigger yacht, or is it looking longer term? As Giles Murphy of Smith & Williamson puts it: “This would be a one-off payment that won’t be repeated. A partner joining the equity the following year wouldn’t benefit.”

Nigel Knowles, managing partner of most people’s favourite for a trailblazing deal of some kind, DLA Piper Rudnick Gray Cary, ruled out an IPO recently (29 May) on the basis that, although it might be good for him, it might not be the best strategy for his firm.

But while the strategy of raising funds for recruitment or expansion is the most likely primary reason for a float, there is no doubt that the upside for senior lawyers is the potential it would create to extract some of the value of the business for themselves in the form of shares. And the growth of the UK legal market over the past 10 years shows that, over time, that value could be significant.

“Say you’re a partner getting close to retirement. With shares in your firm you have something potentially of real value,” argues Hirst. “Right now you have nothing. Gone are the days when an old partner is bought out by a new partner. When a partner retires, that’s it – no more salaries, no more bonuses.

“So the people who’ve loved this project and the people who are going to be driving it are those who are 55-plus. Because right now they’re five years from retiring, and when they retire the gravy train comes to an end.”

Younger lawyers will have a different motivation. For them it will be the growth of the long-term capital value of the business. “But they’ll still be getting their salaries and bonuses along the way,” points out Hirst.

Anecdotal evidence suggests that there have been conversations between partners at most firms on this subject over the past few months. But it should also be stressed that, for the vast majority, it remains a very low priority. One managing partner of a top 10 firm said he had not spoken to anybody at all about the subject.

Other managing partners admitted that they had discussed it, but very briefly, before moving on to other business. Halliwells senior partner Alec Craig said his firm was “reviewing the options”, but also made it clear that this was not in any way in preparation for a deal.

Overall there is a sense that most firms have taken the looming changes on board but have not yet made any significant steps towards doing a deal. According to Hirst, however, there are at least a handful that are already at the planning stage.

He claims that there is at least one firm that has already drawn up its business plan for an IPO. The plan considers the implications of the deal and what it would mean to compensation.

“Then they’ll be coming to a view on an IPO,” says Hirst. “But they haven’t come to a decision to press the green light yet. It all comes down to whether it’s something they feel they can sell to the partnership, because to do it you’d need to dissolve it [the partnership]. You need a strong management to pull this off. The law is quite a conservative industry and people resist change.”

The question is, for how long?

Berwin Leighton Paisner Plc

Initial public offering by The Lawyer of 52,870,000 ordinary shares at £1 per share
This document comprises a prospectus relating to Berwin Leighton Paisner plc (‘BLP’ or ‘the company’) prepared in accordance with the Prospectus Rules made under Section 73A of the Financial Services and Markets Act 2000 (FSMA). The directors of BLP, whose names appear in the section entitled ‘Directors’, do not accept responsibility for the information contained within this document.

Introduction
BLP is a leading corporate and commercial law firm based in the City of London. Its principal business is the delivery of legal and client services in its three main practice areas of real estate, corporate and finance. It also has strengths in litigation and dispute resolution.

Trading record
2003-04 2004-05 2005-06
Turnover £102m £121m £145m
Profit £24.1m £37.1m £47.1m

The offer
Under the offer the company proposes to issue 52,870,000 ordinary shares at £1 per share.

Valuation of the offer
Total revenue* £169m
Profit before tax £54.7m
50 per cent into bonus pool and salaries £27.35m
Pre-tax profit (other 50 per cent) £27.35m
Apply 30 per cent tax £19.14m
Market cap (after multiple applied) £248.82m
Sell 25 per cent £62.2m
Less 15 per cent £52.87m
Total number of directors 80
Total share per partner £660,800
Plus £150K, share of bonus pool and share of remaining 75 per cent of the equity
*based on forecast revenue for financial year 2006-07

Information on the company
BLP is the result of the 2001 merger between two law firms, Berwin Leighton and Paisner & Co.

The company is recognised nationally for its expertise in a number of industry sectors, including real estate, hotels, leisure and gaming, defence, energy, utilities and retail.
Over the past three years the company has averaged growth of 17 per cent in turnover, while profit has more than doubled. In addition, an 18 per cent increase in the average matter size during 2005-06 shows that clients are asking the company to manage bigger and more complex transactions.
The company has an office in Brussels, an alliance with Kramer Levin Naftalis and Frankel in New York and Paris and a ‘best friends’ agreement with Beiten Burkhardt in Germany, Eastern Europe and Asia. It also has a number of ‘preferred firm’ relationships internationally.

Risk factors
The company is closely identified with its biggest client Tesco. The supermarket is understood to represent around 6 per cent of total revenue, although this figure is decreasing as BLP increases in size.

A 2004 dispute with Tesco over the firm’s handling of a property deal highlighted the risks to the company of overdependency on this client. The dispute also highlighted the importance the company places on certain key individuals. Corporate head John Bennet runs the Tesco account and is crucial to the company’s corporate team. Finance head Simon Allan is BLP’s other biggest fee-earner and a similarly pivotal figure.
The company’s international coverage is patchy, but it has recently hired a London-based director to coordinate its approach to building its network.
BLP has hired very aggressively in recent years and has offered guaranteed payments to incoming partners. There is an obvious risk that the new partners will not deliver.

Directors
Chief operating officer Peter Robinson
Chair Harold Paisner
Managing director Neville Eisenberg
Corporate director John Bennett
Banking director Simon Allan
Real estate director Robert MacGregor
Litigation director Jonathan Sacher
Finance director Charlotte Balfry

Use of proceeds
The funds raised by the offer will be used to finance the company’s overseas coverage, with an opening in Munich a priority. BLP will also introduce a new career structure for lawyers, with share options being a core plank of the new bonus system.

Addleshaw Goddard Plc

Initial public offering by The Lawyer of 55,770,000 ordinary shares at £1 per share
This document comprises a prospectus relating to Addleshaw Goddard plc (‘Addleshaws’ or ‘the company’) prepared in accordance with the Prospectus Rules made under Section 73A of the Financial Services and Markets Act 2000 (FSMA). The directors of Addleshaws, whose names appear in the section entitled ‘Directors’, do not accept responsibility for the information contained within this document.

Introduction
Addleshaws is a large national legal services organisation with three offices in London, Leeds and Manchester. Its principal business is the delivery of legal and client services nationally and internationally.

Trading record
2003-04 2004-05 2005-06
Turnover £125.2m £139m £161.2m
Profit £34.7m £40.4m £51.8m

The offer
Under the offer the company proposes to issue 55,770,000 ordinary shares at £1 per share.

Valuation of the offer
Total revenue* £175m
Profit before tax £57.7m
50 per cent into bonus pool and salaries £28.85m
Pre-tax profit (other 50 per cent) £28.85m
Apply 30 per cent tax £20.19m
Market cap (after multiple applied) £262.47m
Sell 25 per cent £65.61m
Less 15 per cent £55.77m
Total number directors 120
Total share per partner £464,750
Plus £150K and share of bonus pool and share of
remaining 75 per cent of the equity
* based on forecast revenue for financial year 2006-07

Information on the company
Addleshaws was created by the merger of Northern-based Addleshaw Booth & Co and London-based Theodore Goddard. It is UK-based but has a wide international network of ‘preferred firms’ with which it works around the world. The company’s strategy is to focus on FTSE350 and comparable organisations in the public and private sectors, as well as private individuals. It aims to be perceived as a credible alternative to magic circle firms in high-value work. The firm’s principal areas of work are commercial, corporate, employment, finance and projects, litigation, private client and real estate.
The company is widely recognised as being among the most innovative in its market, especially in relation to its service to clients. It has launched a complementary relationship management programme in which the company’s own business development professionals train in-house lawyers on dealing with their own ‘clients’. It also runs the Employment Channel, an online television channel that delivers legal training on employment issues.

Risk factors
Addleshaws has spent the years since its merger focusing on increasing profitability and building a London corporate team. Although its aim is to be an alternative to the magic circle, the company has yet to appear regularly on the largest corporate transactions and remains very much in the mid-market in both corporate and finance. The company’s no-nonsense management style is a potential source of unrest for it. This is particularly true of the company’s attempts to integrate its North and South operations and its hard-line approach to underperforming partners. In 2006 the company lost one of its longstanding clients, the British Horse Racing Board, after it lost a high-profile case concerning pre-race data. The loss will have reduced the revenue of the company’s sports practice.

Directors
Chair Paul Lee
Chief executive Mark Jones Chief operating officer Peter Smith Chief financial officer Martin Gaskin Finance and projects divisional managing director Nigel West
Real estate divisional managing director Michael Reevey
Contentious and commercial divisional managing director Malcolm Pike Corporate divisional managing director Paul Devitt
HR director Judith Hardy

Use of proceeds
Continued recruitment and international expansion.

Halliwells Plc

Initial public offering by The Lawyer of 26,690,000 ordinary shares at £1 per share
This document comprises a prospectus relating to Halliwells plc (‘Halliwells’ or ‘the company’) prepared in accordance with the Prospectus Rules made under Section 73A of the Financial Services and Markets Act 2000 (FSMA).
The directors of Halliwells, whose names appear in the section entitled Directors, do not accept responsibility for the information contained within this document.

Introduction
Halliwells is a leading UK-based legal services organisation.

Trading record
2003-04 2004-05 2005-06
Turnover £40.4m £50m £62.7m
Profit £10.8m £16m £20.3m

The offer
Under the offer the company proposes to issue 26,690,000 ordinary shares at £1 per share.

Valuation of the offer
Total revenue* £85m
Profit before tax £27.6m
50 per cent into bonus pool and salaries £13.8m
Pre-tax profit (other 50 per cent) £13.8m
Apply 30 per cent tax £9.66m
Market cap (after multiple applied) £125.58m
Sell 25 per cent £31.39m
Less 15 per cent £26.69m
Total number directors 40
Total share per director £667,200
Plus £150K and share of bonus pool and share of remaining 75 per cent of the equity
* based on forecast revenue for financial year 2006-07

Information on the company
Halliwells is a leading legal services provider with four offices across the UK in Manchester, Liverpool, London and Sheffield. The firm has 1,100 lawyers and staff. The firm provides a full range of services, but is particularly focused on corporate, real estate and litigation.
Its acquisition in 2006 of Manchester law firm James Chapman & Co boosted its insurance litigation department in particular.

Risk factors
Halliwells’ recent growth has very much been driven by managing director Ian Austin. He is closely identified with the company and is seen as its figurehead, an impression reinforced by the removal of the office head positions and a centralising of administration in Manchester.
Austin is young and aggressive, both positives, but there is no clear succession planning as yet and there is always a risk with any company being too closely identified with one partner.
The London office is an obvious weakness. It is large, but has a low profile, and the company has so far failed to capitalise on its City presence.

Directors
Chair Alec Craig
Chief executive officer Ian Austin
Finance director Stephen Roe
Banking director Sue Molloy
Real estate director Mike Edge

Use of proceeds
To grow London.

Shoosmiths Plc

Initial public offering by The Lawyer of 15,630,000 ordinary shares at £1 per share
This document comprises a prospectus relating to Shoosmiths plc (‘Shoosmiths’ or ‘the company’) prepared in accordance with the Prospectus Rules made under Section 73A of the Financial Services and Markets Act 2000 (FSMA). The directors of Shoosmiths, whose names appear in the section entitled ‘Directors’, do not accept responsibility for the information contained within this document.

Introduction
Shoosmiths is a leading UK corporate and commercial legal services organisation based in eight offices across the UK.

Trading record
2003-04 2004-05 2005-06
Turnover £54.6m £60.8m £74.7m
Profit £8m £11.6m £13.8m

The offer
Under the offer the company proposes to issue 15,630,000 ordinary shares at £1 per share.

Valuation of the offer
Total revenue* £85m
Profit before tax £16.15m
50 per cent into bonus pool and salaries £8.07m
Pre-tax profit (other 50 per cent) £8.07m
Apply 30 per cent tax £5.64m
Market cap (after multiple applied) £73.32m
Sell 25 per cent £18.33m
Less 15 per cent £15.63m
Total number of directors 41
Total share per partner £381,200
Plus £150K, share of bonus pool and share of
remaining 75 per cent of the equity
*based on forecast revenue for financial year 2006-07

Information on the company
Shoosmiths is a legal services organisation in the top 50 largest in the UK based on revenue, with 90 partners and more than 1,300 personnel. It is one of the fastest-growing national law firms in the UK with eight offices: two in Northampton, one each in Nottingham, Milton Keynes, Reading, Solent and Birmingham, and a specialist legal expenses division in Basingstoke.
Unlike traditional law firm partnerships, for some years Shoosmiths has operated a corporate management structure with a non-lawyer as chief executive. Its main market sectors are financial institutions, retail, property development (commercial and residential) and regeneration. Its practice is divided into four departments: commercial property, corporate/commercial, dispute resolution and property direct.

Risk factors
Shoosmiths’ success in growing so quickly could also be its Achilles’ heel. Integrating lateral hires and additional offices is always difficult, although the firm’s strong financial performance in recent years suggests that so far it has managed its geographical growth well.
Its portfolio is possibly overdependent on real estate, but this deficiency could be addressed with an injection of new funds.

Directors
Chief executive Paul Stothard Chair Andrew Tubbs Head of legal expenses John Spencer Head of property direct David Parton
Director of corporate and commercial Oliver Brookshaw Director of commercial property Sean Burke Director of dispute resolution Claire Rowe
Employment director Peter Duff
Finance director Chris Stanton

Use of proceeds
Further recruitment of top-quality personnel in the company’s key areas.

DLA Piper Rudnick Gray Cary Plc

Initial public offering by The Lawyer of 106,300,000 ordinary shares at £1 per share
This document comprises a prospectus relating to DLA Piper Rudnick Gray Cary plc (‘DLA Piper’ or ‘the company’) prepared in accordance with the Prospectus Rules made under Section 73A of the Financial Services and Markets Act 2000 (FSMA). The directors do not accept responsibility for the information within this document.

Introduction
DLA Piper is a global legal services organisation. This offer relates exclusively to its European and Asian activities.

Trading record
2003-04 2004-05 2005-06
Turnover £275.4m £322m £366.7m
Profit £54.6m £71.2m £81.7m

The offer
Under the offer the company proposes to issue 106,300,000 ordinary shares at £1 per share.

Valuation of the offer
Total revenue* £415m
Profit before tax £91.3m
50 per cent into bonus pool and salaries £45.6m
Pre-tax profit (other 50 per cent) £45.6m
Apply 30 per cent tax £31.97m
Market cap (after multiple applied) £415.61m
Sell 25 per cent £103.9m
Less 15 per cent £88.4m
Total number of directors 160
Total share per partner £552,500
Plus £150K and share of bonus pool and share of
remaining 75 per cent of the equity
*based on forecast revenue for financial year 2006-07

Information on the company
DLA Piper was created on 1 January 2005 after the three-way merger between the UK-based DLA, which has offices across Europe and Asia, and the US-based Piper Rudnick and Gray Cary Ware & Freidenrich. In total the company has more than 7,000 people and 3,100 lawyers across 59 offices in 22 countries. Its Europe, Asia and Middle East divisions include 37 offices. DLA Piper’s vision is to be “the” leading global business law firm. Its lawyers provide a full range of commercial legal services .

Risk factors
The extremely rapid growth of DLA Piper in recent years has been closely tied to the presence of chief executive Nigel Knowles. If he were to leave, it is highly likely this would have a detrimental effect on the company’s share price. The additional glare of being a public company with shareholders to answer to may prove an impediment to further expansion at a similar pace.
The lack of full financial integration between the Europe, Asia and the US also needs to be addressed. In addition, the company’s China operation is currently involved in a legal dispute with another legal services provider over its Beijing office.
Financially the company’s current average profit per director of £604,000 appears relatively low for a business that, in total revenue terms, now ranks second in the world. This needs to be addressed.

Directors
Chair Peter Wayte
Chief executive Nigel Knowles
Managing director (UK) Andrew Darwin
Managing director (Continental Europe) Steven De Keyser
Managing director (Asia) Nick Seddon
Chief finance officer Paul Edwards
Banking managing director Simon Woolley
Litigation managing director Janet Legrand
Real estate managing director and regional managing director for Leeds Neil McLean
Regional managing director for Italy Federico Sutti

Use of proceeds
Further international expansion in the Ukraine, Turkey, Africa and, when regulations allow, India.

Methodology

How do you float a law firm? The answer, in essence, is in the same way as any other business. The real issue is how you value a law firm.
The argument often put forward by opponents to the idea of a law firm going public is that the law is a ‘people business’ and is therefore not suitable for a listing. But that argument does not hold water. Banks, surveyors, architects and recruitment consultants all feature on a long list of other people businesses that have gone public.
These organisations will provide the most reliable source of comparable data for any broker looking to put a price-to-earnings (p/e) multiple on a law firm.
“The multiple will be around 12-14 times earnings,” says investment banker Julian Hirst. “There’s going to be a big premium for national firms and multidisciplinary firms – and City firms.” (Earnings in the context of a law firm means profit after tax.)
The process of floating the firm will be the same as that for any other business. The firm’s stockbroker will look at its last three fiscal years of audited financials and produce a forecast and a research report. “And they’ll be focused on profit, not revenue,” says Hirst. “Profit’s the key to this thing.”
The partnership will have to be dissolved, the firm incorporated and the profit and loss account reconstituted by installing a layer of salaries for all staff, including partners, and assumed bonuses.
“The key thing is that you’re going to have a costs line that’s going to have salaries, with national insurance paid on it, and then a bonus pool, for which there’ll be a formula,” explains Hirst. “In my model I’m saying it’ll be 50 per cent of pre-tax profit. The remaining 50 per cent is available for shareholders.”
For example, a firm with a revenue of £100m and a 30 per cent profit margin would put half of its profit (£15m) into its bonus pool, leaving a pre-tax profit of £15m. With 30 per cent corporation tax payable on this, the net profit will be 70 per cent of £15m, or £10.5m. The p/e multiple will be applied to that. Multiplying it by 13 (ie a multiple of between 12 and 14) gives a £136.5m market capitalisation. If the firm floats 25 per cent, it would raise £34m (minus directors’ salaries and national insurance contributions).
A 15 per cent IPO discount, to take account of the risk investors are taking by buying into a company that has not traded before in a new se