The announcement by a group of Perth (Western Australia) lawyers in October 2006 that they were planning to launch the first public float of an Australian law firm took many in the profession by surprise.
Plans for the December 2006 float came unstuck, however, when the Australian Securities and Investment Commission (Asic) issued an interim stop order preventing the company from proceeding, after concerns were expressed by the Legal Practice Board of Western Australia (LPBWA).
The Integrated Legal Holdings (ILH) prospectus indicated that it hoped to raise A$14m (£5.64m) by selling a stake in a company that would acquire a number of law firms, an online legal documents business and professional consultancy firms. Further expansion, by way of taking equity in a number of small firms and then aggregating them, could follow the capital raising.
According to media reports the concerns of the LPBWA were twofold: relating to the goodwill in the prospectus (what it comprised and how it was being calculated); and the multiples used to determine the acquisition price for each law firm.
More broadly within the legal profession, strong concerns were expressed about the potential for conflicts of interest arising within the aggregation of legal practices.
Now ILH has announced that an amended prospectus will be ready by the end of February, with a view to listing on the Australian Stock Exchange (ASX) before the end of June.
The ILH proposal is being watched closely, not only by other Australian law firms, but also in the UK, where the Legal Services Bill is expected to allow UK firms to float later this year.
There is extraordinary interest in the concept of publicly listed law firms, and since the ILH announcement there has been conjecture that other Australian law firms – perhaps even the behemoths of the profession – could also seek a place on the ASX.
It has even been suggested that, given the flurry of private equity and M&A activity that has characterised the Australian market in the past year, private investors have been looking over prospects in the legal services sector as well.
With high margins, stable cashflows and a strong flow of business, some say that law firms make very attractive targets. But is there really a compelling reason for law firms to list?There are three reasons an organisation may choose to list. First, it can enable them to acquire the capital needed to fund a change in business direction. For example, a number of consulting firms listed in the 1990s in order to fund moves into being major outsourcing providers. This necessitated buying up client equipment and staff contracts and there was a clear use of the capital raised.
Second, listing can provide funds for acquisitions. However, when law firms undertake acquisition activity it is more usually in the form of a merger of equals. This has been the case around the world and there is not generally a significant cash component to the deal.
Third, there is the ‘get rich quick’ motivation, where current owners prosper from a listing. The catalyst for the ILH move has been the new uniform legal profession laws in Victoria, New South Wales and Western Australia – laws that will be replicated in the other Australian states soon. They allow firms to incorporate and bring in non-lawyer equity holders.
But the real driver behind the move to list seems to be to replicate the size and economies of scale enjoyed by Australia’s big law firms.
Whether or not the expected economies of scale and scope will deliver greater profits is debatable. Those who have studied listed networks of professional services firms say the firms best suited to extract those economies specialise in commoditised work. The disparate work of a network of aggregated legal practices does not quite fit the bill.
What’s in it for law firms?
But what of the suggestion that one of Australia’s ‘big six’ law firms might also be enticed to go to the market? Minter Ellison is on the record as saying it is not interested in listing, and that position is probably indicative of the views of the other large firms as well.
If a firm lists it starts sharing profit with external shareholders. In a law firm all of the profit comes from delivering legal services to clients. What external shareholder could possibly add value to the ability of the firm to provide those services?
Some argue that listing would allow firms to ‘buy’ partners or practice areas, or invest in new legal products. But would top-performing partners, on whom clients and firms are so dependent, be motivated by a firm using newfound cash to lure new talent? Indeed, would these same high performers be happy to forego control to new non-lawyer owners? And as for new legal products, if there really is a business case for a new product, why would a top-tier and top-performing law firm not simply fund the investment from retained earnings or debt financing?
Then there is the thorny issue of conflicts. Conflicts of interest could easily arise between an organisation that is both a major shareholder of the firm and on the opposite side of commercial litigation against one of the firm’s clients.
Certainly, Australia’s law firms are facing challenges: how to continue to grow in a mature market to open up opportunities for the next generation; retaining talent; ensuring efficiencies in service delivery; and finding ways to export their expertise and skills into relevant markets overseas.
Essentially, however, none of these challenges will be resolved by an influx of capital and by bringing in outside shareholders.
Law firms prosper when professionals in those firms are completely engaged and committed to delivering value to clients. The objective is to form a ‘virtuous circle’, whereby having the best people attracts the best work in the market and the very best clients.
This leads to the professionals being highly utilised and motivated on meaningful work, which drives high profits. The high performance of firms then leads to the ability to attract and retain the best people and the virtuous circle continues.
Could external owners improve such a system? Most law firms remain unconvinced.
Building relationships, delivering effective legal services, growing organically in relevant markets, building economies of scale and selling cross-jurisdictional services are the best ways to meet the challenges facing law firms all over the world.
Yes, law firms do need to review their business models continually to provide clear and focused strategy, introduce greater clarity around decision-making, eliminate confusion between the role of partners as shareholders, to develop a strong culture of aligned people and create opportunities to leverage the business model for growth. But no, there is no compelling reason for a large firm to list, and doing so would break down the virtuous circles that make the best firms the best.
•Guy Templeton is chief executive and Rob Hanley is London managing partner at Minter Ellison