DWF has bolted on five firms in the space of a year. Not everyone is convinced about the way the parts fit together
It is only a month since DWF completed its rescue acquisition of dying Manchester firm Cobbetts, but managing partner Andrew Leaitherland is already bullish about further expansion.
“There’s inevitably going to be a process of consolidation, but there are no new office locations to deal with and we know the firm really well,” says Leaitherland. “Integration will not be easy, but it will be relatively straightforward. There’s no doubt we’ll be focusing on London next and making sure the international pieces fit together. We’re not going to have another year where we do five mergers, but we won’t slow down if that’s what our clients say they want.”
Speak to other DWF partners, however, and you get the impression not everyone at the firm is in as much of a hurry to push on with the expansion as Leaitherland.
“We’re just trying to keep up with the influx of Cobbetts people at the moment and I don’t think there’d be much support for Andrew to go and do more until the Cobbetts merger has been settled in,” says one partner. That said, they add that there has been “real enthusiasm” among everyone at DWF for the Cobbetts merger.
Well, there had better be because under Leaitherland’s leadership, rapid expansion has become a central part of DWF’s DNA.
A snapshot of the firm’s recent history, which reveals incredible stamina for piling mergers and bolt-on deals on top of each other, goes something like this: in July 2011 DWF expanded into Birmingham after hiring Shoosmiths head of finance Joanne Davis. It then took over Newcastle firm Crutes in January 2012 and bolted on small Birmingham and Coventry firm Buller Jeffries in April 2012.
DWF followed that up with the acquisition of Scottish law firm Biggart Baillie in July 2012 and then tied up with professional indemnity practice Fishburns in January this year.
As well as looking to bulk up in London – where DWF has around 39 lawyers – there is persistent talk that DWF is keen to find another firm to swallow up in Scotland, with 16-partner HBM Sayers mentioned as a possible target.
But Cobbetts is a bigger target than DWF is used to. Cobbetts’ last published turnover, in 2011/12, was £45.2m. Although DWF did not take on all of Cobbetts (see box, below) the acquisition will still add £40m of revenue to DWF’s top line.
In addition to being bigger, Cobbetts is a different animal to the sort DWF is used to.
While DWF was expanding off the foundations of its volume litigation business, Cobbetts was more of a prestige firm in Manchester. Its corporate practice was a jewel that could lift DWF into a higher deal bracket, provided clients do not abandon the Cobbetts partners. Cobbetts also had a pedigree in real estate that was none too shabby, even if that market remains comparatively lousy.
Assimilating Cobbetts’ 420 partners and employees could upset the balance within DWF in terms of the practice areas that hold most sway, even if none of the Cobbetts partners have joined the equity.
“There’s a split between the insurance business and the commercial business at DWF,” says one partner at the firm. “Insurance was where the growth was in the 1990s and until the merger with Cobbetts, small-scale insurance practices made up half the firm.”
There are plenty of reasons why the DWF/Cobbetts combination could be a good thing.
“I always thought the two firms were a good fit in terms of practices,” says one former Cobbetts partner. “But DWF had a good look at Cobbetts’ books in 2012, didn’t like what it saw and said no. But this time round it’s a good move for them, and whether it’s a good fit culturally has become a moot point as the Cobbetts partners didn’t have a choice.”
Even if culture is a moot point, sources at the firm say DWF’s management is making the effort. One DWF partner describes the way Guy Wallis, who helped establish DWF in the 1970s and now works as a consultant, has been at great pains to make Cobbetts staff feel welcome.
Wallis was particularly keen, says the partner, to stress that DWF has never been afraid to take on businesses and people who may have been higher up the food chain.
“He was saying to [the Cobbetts] partners ‘we’ve made you a home here, but we recognise you may have skills we don’t have – which is nice a change from places where they only recruit those they don’t see as a threat’.”
Some would say this attitude does not square with the news that five senior Cobbetts partners have already been asked to leave DWF, but Leaitherland was upfront about the likelihood of cuts when the deal was announced.
Overall, the noises coming out of DWF are encouraging. And few would argue with the logic behind its growth strategy: mid-market consolidation is a must for any firm not practising some sort of vital niche. Nonetheless, it is inevitable that the pace of change at DWF would leave some of its partners and staff feeling disenfranchised.
“I worked at DWF for around a decade and had a really good time there,” says one former partner, “but it’s a very different firm to the one I joined. Back then it was just a Liverpool firm with a Manchester office. Leaitherland had all these top 30 ambitions and we could all see why you’d want to be in the top 30, but we also thought he turned his back on the firm’s roots. We ended up being the legacy business – just there to support the investment business.”
Another sticking point for the partner was DWF’s equity partnership. Becoming an equity partner at DWF has always been tough. The firm has one of the tightest equities of any full-service firm in the UK, hovering around the 20-25 per cent mark. But as DWF expands from a regional volume business to become a national player with more serious corporate and commercial sensibilities, it needs lateral hires. And to get the right people it must offer equity.
“Practically the only way to get equity there now is to be a lateral hire,” says the former partner. “It’s one of the tightest equities in the market anyway. If you were part of the legacy business you had to jump through a lot of hoops to get it, but if you were a lateral hire who had said you’d get Sainsbury’s to come across as a client, they’d give it to you straight away.”
Illustrating DWF’s focus on building on new growth areas the firm made five lateral hires into corporate and commercial in 2011/12 and four into banking & finance, but only two in insurance. In terms of total headcount at DWF, insurance grew by 22 per cent in 2011/12 while corporate and commercial grew by 28 per cent.
Another complaint has been that partners were kept largely in the dark over the firm’s strategic and operational plans and that DWF was really Leaitherland’s show.
“One partner who was leaving told me he felt he had a lot of money tied up in the firm, but no control over decisions,” says the former partner. “All the control was with Leaitherland.”
In the mould
From the outside it is hard to argue that DWF looks like a one-man show. It would appear to fit a mould, too. Firms that have pursued the most aggressive expansion plans, such as DLA Piper and Norton Rose, tend to have CEO-style leaders and wider partnerships that are less engaged with strategy.
Leaitherland is DWF’s first and only managing partner. He was elected in January 2006 and, at 36 years old, was one of the youngest firm leaders when he took the reins.
Until Leaitherland’s election DWF had been run by a board, senior partner and chairman. Leaitherland was a member of the board, but says it would “take a long time to make small management decisions, which made it hard to build any momentum”.
That much is uncontroversial. The firm decided it needed to become more decisive and so scrapped the board in favour of a managing partner and strategic team. The firm’s senior partner Jim Davies kept his role but divested his operational responsibilities to the managing partner. Non-lawyer chairman John Paton also kept his job for a time, but was replaced in 2007 by insolvency specialist Alan Benzie.
Leaitherland first joined DWF from Field Cunningham & Co (which was taken over by Linder Myers in 2012 in a pre-pack deal) in 1994, but then left for Davies Arnold Cooper (now DAC Beachcroft) after three years. He returned to DWF in 1999 and the following year was made a partner in the employment team.
“Leaitherland came back as an employment partner and grew the team a lot – and he grew the HR business quite a lot too,” says a former DWF partner.
By the time of the 2006 election Leaitherland was a board member and head of the firm’s HR practice. In the elections Leaitherland stood against the firm’s now nationwide head of insurance Paul Berry, who was in a powerful position thanks to his relationship with client Royal & Sun Alliance (RSA).
RSA has for years been one of DWF’s biggest clients. In 2006/07, when the firm’s turnover was £50m, one partner who was at the firm at the time estimates that RSA accounted for around £10m of that figure. Berry remains in charge of the relationship with RSA and sources say he is still a real influence and driving force at the firm.
But Leaitherland had his own lucrative client, contractor accountancy firm Brookson, which helped propel him onto the management team.
Leaitherland was known for being ambitious and, by his own admission, says he has “always had a bit of drive”. That may be an understatement. Such was his ambition that one former DWF lawyer says Leaitherland became known as the Duke of Warrington, where the firm had an office at the time.
Leaitherland’s ambition to make DWF a top 30 practice in terms of revenue by 2010 was first articulated at a partner conference in the Lake District in 2008. It was the same year that DWF launched in London after hiring two partners from Davies Lavery, which had just merged with Kennedys.
“We could see there was going to be consolidation in the market among firms,” says Leaitherland, explaining DWF’s decision to expand aggressively. “But we were looking at it from a client services perspective. We could see that procurement was going to play a big role and there were going to be fewer panel spots. […] so we started growing geographically, but also along our service lines.”
Leaitherland says he picked the top 30 strategy because he wanted it to be something that was easily understood by everyone in the business and something easy to articulate. But in addition to growing revenue, at the Lake District conference Leaitherland talked about moving into new ‘heavy lifting’ practice areas.
“[Management] said they were going to focus on four heavy lifting areas: corporate, banking, commercial litigation and real estate,” says one international law firm partner who was at DWF at the time. “But DWF didn’t have a great success doing that because it didn’t have the clients, the relationships or the lawyers. Two years ago they publicly abandoned the strategy.”
Leaitherland confirms that he did talk about heavy lifting areas and that has now changed, but says this was a strategic decision.
“Our new strategy is sector-based,” he says. “We’re making sure we’ve got strength and depth where clients want it: in insurance, real estate and financial services. But also across the retail, food, public sector, education and transport sectors.”
In any event, the downturn scuppered any chances DWF had of becoming a top 30 firm by 2010. Leaitherland was forced to push back the timeline, but eventually made number 39 in 2010/11.
That hiccough aside, DWF’s expansion in the past decade has been rapid. Between 2000/01 and 2011/12, turnover grew by 448 per cent, from £18.6m to £102m.
Between 2002/03 and 2011/12 net profit at the firm has grown by 222 per cent, from £4.5m to £14.5m. The firm’s profit margin is less impressive than its turnover figure, but that must be expected from a firm whose main business is insurance litigation. Profit margin reached 19 per cent in 2005/06, but dropped to 11 per cent in 2008/09. In the financial year just gone, profit margin was back up to 14 per cent.
Average profit per equity partner (PEP) at the firm has risen from £235,000 in 2001/02 to £412,000 in 2011/12. Between 2005/6 and 2011/12 there was a 24.1 per cent rise, which outstripped the rise in earnings per partner, which rose from £168,000 to £172,000 over the same period.
Since 2001/02 lawyer numbers have increased from 142 to 461. However, the firm also has around 431 non-lawyer fee-earners (which includes trainees, paralegals and assistants). Again, this is not a surprise given the firm’s reliance on high-volume insurance work.
Since 2002/03, partner numbers have risen from 54 to 152 at the end of the 2011/12 financial year. Over the same period equity partner numbers have risen from 19 to 37, meaning that the proportion of partners with equity has fallen from 35 to 24 per cent. Between 2002/03 and 2003/04 the equity spread at DWF has risen from £90,000-£180,000 to £224,000-£833,000.
Leaitherland adds that the ‘running rate’ at the firm is now around £200m, meaning that is how much a full year’s turnover would be after taking in revenue from all of the mergers and bolt-ons. On top of DWF’s 2011/12 turnover of £102m, the acquisition of Cobbetts will add £42m to the business, Biggart Baillie will add £16m, Fishburns £21m and Buller Jeffries £3m. Factor in DWF’s organic growth, and according to Leaitherland, that makes £200m. If that is the case he should have no problem achieving his new target of making DWF a top 20 firm in 2012/13.
While it is hard not to be impressed by DWF’s rate of growth, there is still an underlying suspicion in the market as to the stability of that growth.
“DWF has tremendous energy to get so big so quickly, which is admirable,” says one law firm manager. “We’ve completed smaller mergers in the past and even they took a lot out of us, but I’m not sure how it all fits together at DWF.
“Also, it’s interesting to note that Cobbetts were doing similar things 10 years ago and it didn’t work for them. It’s simply impossible to have a one-firm approach with all that growth. How do you keep everybody cohesive and part of the organisation? Also, the thing that would terrify me is the debt. Just to take on another firm and put it on the same IT system is very expensive.”
Leaitherland is adamant that debt is not a problem. He argues the increased revenue and cost savings that come with completing the mergers more than offsets the expense incurred in bringing two businesses together, as well as the fact that most of DWF’s acquisitions have been inexpensive for one reason or another.
DWF’s LLP accounts show the firm’s total borrowings only increased from £8.3m to £11.7m
between 2006/07 and 2011/12. That means borrowings were 11.5 per cent of revenue in the financial year just gone. Leaitherland says that at the end of 2012/13, following the five mergers, borrowings will be £20m, which is still healthy.
There remains a sort of snobbishness about DWF’s volume-work roots. One former partner of the firm believes that DWF’s plans to branch out into more complex corporate and commercial work is doomed to fail because the lawyers it needs to do those deals will not feel comfortable at the firm.
“When they do volume work they do it quite well,” says the former partner. “But that means having a lot of bums on seats and paying low wages. If you’re the corporate guy they’ve brought in to do the grey-hair stuff [the more complex work] you won’t have the perks you’d get at other firms, like your own office. You’ll be in an open-plan office and have a tiny desk.”
People may be sceptical about DWF’s rapid ascent, but at least it cannot be said the firm is boring.
As one law firm leader sums up: “I think you could spin a coin and see which way it goes for the firm, but you can’t argue with the fact that DWF is firing on all cylinders at the moment.”
How the Cobbetts deal was done
DWF acquired Cobbetts in a pre-pack administration deal at the High Court in London on 6 February. DWF managing partner Andrew Leaitherland told The Lawyer that, from start to finish, the deal took around 17 days. But this was no whimsical purchase by DWF, but smacked of commercial savvy.
DWF and Cobbetts had been in merger talks in late 2011, when it emerged that DWF had registered the name www.dwf-cobbetts.com. Leaitherland said this was down to an “overzealous IT employee”. Either way, the talks broke down in early 2012 with both parties citing “uncertain market conditions”. Now it seems that DWF got close enough to Cobbetts’ books to know it would not be getting a good deal.
By late 2012 the situation had deteriorated for Cobbetts. A drop in corporate and property transactions combined with burdensome rent meant the firm was struggling to pay its costs.
It had even arranged deals with HMRC to postpone tax bills. Cobbetts filed notice to appoint administrators on 28 January after threats from its landlord.
DWF agreed to look at taking on the whole of Cobbetts on the condition that it was the only buyer in the frame, even though other players were interested. One such firm, as reported by The Lawyer, was Pannone.
In the end, DWF agreed to rescue Cobbetts, but not all of it. The firm’s debt recovery business, Incasso, was sold to HL Legal, while its 27-strong finance litigation team went to Walker Morris.
None of Cobbetts’ partners have joined DWF as equity partners, although the firm will review this after one year. Cobbetts partners are also subject to a two-year lock-in.
DWF paid £3.8m for Cobbetts’ debts and work-in-progress. Contrast this with the £53.8m valuation of Russell Jones & Walker when Australian firm Slater & Gordonbought it on 30 January and you get an idea of the bargain DWF has got.
Indeed, some have suggested that creditors may start asking why the main assets were sold so cheap.