Pride before a fall. Everything was going well when the world’s first listed law firm, Slater and Gordon, announced another blockbuster UK buyout in early 2015.
‘In getting to this point, we undertook a very extensive due diligence process,’ said the firm’s managing director, Andrew Grech. ‘The business we are buying is of high quality with robust infrastructure and systems, and good people. This move will accelerate and consolidate our position in the UK market, and bring benefits to the clients and staff of both businesses.’
But Slater and Gordon’s £637m acquisition of Quindell (now Watchstone Group)’s professional services division proved to be a significant misstep. The UK partnership is now claiming Quindell fraudulently misrepresented itself during the deal, which heralded the downward spiral it finds itself in.
It was an unexpected turn of events. By 2015, Australia-based Slater and Gordon was a major player in the UK for personal injury (PI) and clinical negligence work. It used its valuation to spend big on acquiring smaller firms to increase market share. The firm was confident and ambitious, enjoying a high-profile public image through a concerted advertising campaign. As one law firm leader notes, it was set on becoming ‘the consumer legal brand’.
But three years later, the slide of the UK business has seen it left out in the cold as its Australian parent has grown tired of shouldering the loss of UK revenues and UK legal staff. Yet for some, the firm is as strong as ever in the UK. As one PI partner puts it: ‘The interesting thing about Slater and Gordon is that it is still a brand that’s getting work through the door. It’s really surprising. You’d have thought that people would have real concerns about the financial viability of the operation.’
How did it come to this, and how long has Slater and Gordon UK got to regain its footing?
The rise
Following its formation in Melbourne in 1935, Slater and Gordon crafted a domestic reputation for taking on high-profile claimant cases on behalf of underdogs. Notably, in 1989 the firm successfully represented hundreds of asbestos miners at the Wittenoom mine in Western Australia who had developed health conditions, winning A$18.2m in damages.
But Slater and Gordon caught everyone’s attention in 2007 when it became the first law firm in the world to go public. Any perceived incompatibilities between a lawyer’s duties and shareholder demands were quashed, as the extra funds afforded by the Australian Securities Exchange (ASX) listing heralded an era of expansion.
The journey was eased by the introduction of the Legal Services Act in the UK a decade ago. It cut red tape and allowed non-legal entities to enter the legal market via alternative business structures (ABSs), opening up the much larger UK PI market to Slater and Gordon.
The first UK acquisition was Russell Jones & Walker (RJW), an established PI shop with over 400 staff dotted across the country. A deal was announced in January 2012, and the £53.8m move was finalised in April after the Solicitors Regulation Authority granted Slater and Gordon an ABS licence.
RJW’s chief executive at the time was Neil Kinsella and he was swayed by the public setup, declaring at the time of the merger: ‘Slater and Gordon publicly listed five years ago, which gives us a five-year head start on any UK firm considering this option.’ Kinsella would go on to become its UK chief.
A year later, the firm made a A$63.9m equity raising to fund further expansion in the UK. After picking up a host of smaller firms, including John Pickering and Partners and Fentons Solicitors, in November 2013 Slater and Gordon acquired the consumer services and PI business of Manchester firm Pannone for £33m. The buyout was touted to increase its operations in the UK by around 50% and grow headcount to over 1,200.
Slater and Gordon was preoccupied with breaking new ground in the UK, launching a sustained advertising campaign upon arrival in an attempt to become the first household-name law firm. It splashed out £1m, bringing in agency M&C Saatchi to produce three television ads and littered the London Underground with promotional posters. One provocative poster read: ‘Going through a divorce? Call us before your ex does.’
‘The Quindell buyout was complete and utter hubris.’
Former Slater and Gordon partner
Such bold rhetoric was indicative of a firm feeling at the peak of its powers, but detractors say it was the first symptom of over-ambition. One partner at a rival PI practice says: ‘It’s extraordinarily hard to create a household name for a law firm. If you were to ask the next 20 people on the street to name a law firm, they would struggle.’
The peak of Slater and Gordon’s spending spree was the buyout of the professional services arm of insurance claims business Quindell. Completed in March 2015, the £637m deal dwarfed the sums paid for either RJW or Pannone and significantly extended its share of the UK PI market.
But suspicions over the financial stability of Quindell began to emerge in the months preceding the acquisition, with investment house Gotham City Research criticising its accounting procedures. Quindell later won a libel action when Gotham City failed to turn up and defend its statement in a British court, but the damage was done to the share price. As a result, an extensive period of due diligence took place, with Grech being parachuted in to support Slater and Gordon’s UK head Ken Fowlie in getting the deal over the line.
The UK partnership also harboured doubts. One former partner recalls that the business history of Quindell founder Rob Terry raised eyebrows within the firm and in the wider market. A 2014 article in the Financial Times reported Terry’s ‘business career is marked by financial misfortune, including share price crashes at two other companies he led. He has also been a director of at least four other businesses that have gone into receivership during his tenure as a director or shortly thereafter’.
According to the firm, Slater and Gordon’s assessment of Quindell’s books rested on its work in progress. Quindell had a significant portfolio of unresolved noise-induced hearing loss cases. Allegedly, the conundrum for management was whether to take the gamble as to whether these cases would be successful.
The ensuing disastrous performance points towards ineffective due diligence (see ‘History in finances’, right). Knights’ chief executive and partnership law expert David Beech says: ‘It was not done properly. It focused on growth, not cash generation. It’s fundamental to focus on cash generation.’
Even at the time, ‘it was clear to experienced people at the firm that Quindell was rubbish’, argues one PI partner at a rival firm.
The rash nature of the acquisition was symptomatic of a firm that felt invincible. One former partner summarises: ‘The Quindell buyout was complete and utter hubris.’
The fallout
If there were concerns before the Quindell deal was signed, alarm bells began to ring fully on completion. Just months after selling its professional services division to Slater and Gordon UK, Quindell became the subject of a Financial Conduct Authority (FCA) investigation and suspended trading in its shares.
The FCA announced in June 2015 it was looking into public statements made by Quindell regarding its 2013/14 accounts, with Quindell itself already admitting in March 2015 its accounting policies ‘were largely acceptable but were at the aggressive end of acceptable practice’.
How acceptable these practices were is debatable, as Quindell had to restate its 2013 financial performance due to a rejig of its accounting policy. As a result, its 2013 profit after tax was revised from an £83m profit to a £68m loss, while its net assets at 31 December 2013 were amended from £668m to £446m.
Quindell would later become subject to an investigation by the Serious Fraud Office, with the UK watchdog confirming that it was looking into the company’s ‘business and accounting practices’.
As the reality set in that Slater and Gordon had bought a hugely troubled business, the firm itself came under the spotlight. On 24 June 2015, media reports began circulating that the Australian Securities and Investments Commission (ASIC) was on the verge of probing Slater and Gordon over its accounting practices, a claim that the firm denounced as ‘incorrect and misleading’ in an ASX announcement that day.
Five days later, Slater and Gordon confirmed an ASIC investigation and the firm’s share price tumbled 25%. In the announcement, the firm revealed that its initial findings had uncovered a ‘consolidation error in the reporting of the historical UK cashflows’.
For the six months ending 31 December 2015, Slater and Gordon posted a A$958m loss, primarily due to a hefty write-down of its UK business. This included an A$814.2m impairment in goodwill for its Quindell division, since rebranded as Slater Gordon Solutions.
A former partner argues that Kinsella became a scapegoat when the Quindell deal turned sour, despite Grech and Fowlie conducting the majority of the deal. ‘He’s a nice guy; I’ve got a lot of time for him. Unfortunately he was caught in one of those positions where you can’t really defend yourself.’
Slater and Gordon UK’s rapidly deteriorating financial health spread fears among partners who had invested capital in the firm. One ex-partner recalls: ‘Once it was clear the firm was struggling, the members wanted to go back to being salaried employees.’ Another claims that while people had in mind what happened to Halliwells – the top-50 UK practice that collapsed in 2010 – individuals at Slater and Gordon were ultimately willing to take the risk of staying at the firm.
A former partner argues that Neil Kinsella became a scapegoat when the Quindell deal turned sour, despite Andrew Grech (pictured) and Ken Fowlie conducting the majority of the deal.
The UK business has continued to slip from its pedestal since, shedding revenue and partners alike. The high-profile departures kicked off with the exit of UK chief executive Kinsella in February 2016. Around the same time, the firm announced plans to potentially axe two UK offices, threatening the jobs of 51 staff in Derby and Manchester.
In September 2016, Slater and Gordon UK announced it was to sue Watchstone over the Quindell acquisition, claiming fraudulent misrepresentation.
In the firm’s particulars of claim, it is alleged that Quindell had advertised its average dilution rate (described as ‘the expected rate at which cases accepted by Quindell would fail’) for road traffic accident claims at 11.2%.
According to Slater and Gordon UK (claim particulars signed by Fowlie in June 2017), Quindell had asked PwC to conduct an independent review of its accounting policies in December 2014, in what has been dubbed ‘Project Goldfish’. The claim states the review allegedly found Quindell’s dilution rates were ‘somewhat aggressive’ and ‘at least 5% too low’. Slater and Gordon maintains that this report was not provided to them.
The firm has vowed to pursue the claim ‘vigorously’, while Watchstone said it would ‘robustly’ defend itself and accused the firm of continuously refusing to disclose key relevant evidence. In its summary of defence, Watchstone states: ‘S&G’s allegations of deceit and the associated breach of warranty claim are wholly without merit and should never have been advanced.’
Responding to the claim that it misrepresented its dilution rates, Watchstone responded: ‘S&G… have made repeated public announcements they did not need to, and did not, rely on the dilution rates or other assumptions provided by Quindell. Rather, they boasted publicly that they had carried out their own calculations and made their own judgements based on their comprehensive due diligence, and their own experience as a rival in the same market and in M&A in the UK and Australia.’
During 2017, the firm has undergone wholesale changes to its structure to resuscitate itself. Grech, who led Slater and Gordon through its post-financial crisis glory days, stepped down in June as part of a recapitalisation plan that saw the firm’s entire board replaced. The firm’s senior lenders, New York private equity house Anchorage Capital Partners, stepped in to take control as part of a plan expected to grant it 95% ownership of the firm’s equity by 2018.
Slater and Gordon’s Australia arm has confirmed that until the plan, dubbed ‘the lenders scheme of arrangement’, completes, the firm will not be able to make any public comment. In response to the points put to the firm in this article, a spokesperson for Slater and Gordon’s UK arm said: ‘As the article is based principally on groundless allegations, inaccuracies, distortions, conflations, misrepresentations and gossip, we will not legitimise it by responding individually to the “claims”. Slater and Gordon’s priority is, and will always be, its employees, and providing people with access to world-class legal services.’
‘The lenders are the ones who are going to want to get their money back first. Partners are going to be at the bottom of the list.’
Peter Garry, Keystone Law
In an emphatic move, the firm announced in August that it was to sever the UK business from the Australian parent, forming ‘UK HoldCo’. In December, the firm revealed its shareholders had voted in favour of the recapitalisation plan at their AGM (about 70% to 30%) in a move that will see the lenders take control and the UK arm split from Australia. Symbolically and literally cutting its ties with the UK, Slater and Gordon declared to the ASX that the separation ‘will enable the company to focus its management’s time and resources on the Australian business’. In December, Slater and Gordon UK announced it is to close four of its offices as it seeks to consolidate its operations, relocating employees from smaller regional outposts to its larger offices in the country.
The aftermath
The consensus among those interviewed for this feature is that communication from senior individuals to the UK partnership was poor. A former partner says: ‘Morale was not good. Nobody knew what was going on because there was no communication from a senior level. Partners that are still there have been given assurances; they’re sold a very happy story.’
The situation has become more severe since the senior lenders took control. Another partnership law expert, Keystone Law’s Peter Garry, notes: ‘The lenders are the ones who are going to want to get their money back first. Partners are going to be at the bottom of the list.’
But despite the turmoil, peers have praised the firm’s perseverance. One PI partner ‘hears of very high caseloads with not enough resources’ but claims: ‘Some people are saying: “Let’s get our heads down and get on with it.”’
Ironically, a significant contributor to the current poor morale is the inability of partners to meet high demand, demand created by the firm’s marketing drive. ‘The UK Slater and Gordon can clearly generate business because it spent a fortune on advertising,’ Garry observes.
That the firm is still getting work in raises hope about the future prospects of the business. In an attempt to consolidate, lenders have been trying to sell off UK assets, including the main legal business and the former Quindell division.
The primary obstacle, one former partner argues, is attracting suitors: ‘Potential buyers will be interested in buying the cases that already exist. But there’s no guarantee that the clients will stay with you.’
Nonetheless, suitors have come forward. A large section of those interviewed suggested that PI competitor Irwin Mitchell could be in a position to acquire Slater and Gordon’s UK business, as the next biggest player in the market. A partner at a rival PI firm said it will be ‘an item on the agenda’ for Irwin Mitchell, as ‘there are thousands of cases that it can deal with’.
Slater and Gordon’s history in finances
In terms of Slater Gordon Solutions (the rebranded Quindell), top-50 insurance firm BLM has expressed an interest, releasing a statement that reads: ‘Conversations with Slater and Gordon about working closely with its business legal services experts are in early stages.’
With BLM already taking on a 33-lawyer team, including 11 partners and made up of real estate, employment and litigation specialists, in October, further discussions between the two firms over a potential acquisition look likely.
The negative PR around the Slater and Gordon UK saga could put off other firms wanting to adopt the listed model. However, it did not stop Legal Business 100 firm Gordon Dadds, which listed on the Alternative Investment Market (AIM) this summer following a reverse takeover by Work Group and Keystone Law, which had its initial public offering on AIM in November. Top-50 firm Gateley was also undeterred in 2015 when it became the first UK firm to list on AIM. However, Gateley chief executive Michael Ward recalls: ‘By the time of our initial public offering they had already done the Quindell acquisition, which the market did not understand. We had to differentiate ourselves from Slater and Gordon – we had to make sure people realised we were different.’
Gateley has now taken up the mantle of trailblazing the listed law firm model in the UK and selling it to the wider market. After listing at 95p in June 2015, the firm’s share price peaked at £1.96 and stood at £1.82 at the end of January.
The harsh reality is that despite the best efforts of partners to persevere, Slater and Gordon is now in the hands of its senior lenders. Garry summarises: ‘In theory, the UK business should be capable of making some money. But the lenders will be inclined to sell, provided there’s a suitable buyer out there.’
Selling UK assets is the most sensible option; the firm’s financial performance confirms this fact. For the 2016/17 financial year, the firm’s main UK business saw fee and service revenue drop 17% to A$157.8m (£89.3m) while Slater Gordon Solutions recorded a 26% fall in fee and service revenues to A$268.8m (£152.1m) (see ‘Slater and Gordon’s history in finances’, opposite).
Certainly Slater and Gordon UK will want to avoid going the way of Scottish firm Simpson Millar, which in December 2017 announced that it would launch a restructuring and redundancy consultation, with around 20% of its staff affected. Simpson was owned by debt management business Fairpoint Group, which ran into financial difficulties and did not invest in the firm, leading to Doorway Capital coming in with a £5m investment into Simpson.
Slater and Gordon’s UK business was undermined by one disastrous deal, but strength remains in its workflow and people. This is supported by the testimony of former partners, one of which concludes: ‘It was a friendly firm to work at with a lot of good lawyers. But undoubtedly the Quindell deal was the elephant in the room. The speculation about the future of the firm contributed to it feeling anxious. There’s no doubt about that.’ LB