Penningtons’ takeover of troubled Manches last month says almost as much about the state of the legal market as it does of the firms involved, although, Manches’ administrators say, there are clear lessons to be learned.
On 15 October, 265 Manches employees, including 46 partners officially moved to Penningtons in a pre-pack deal brokered by PwC.
Manches had been earmarked for a merger by the LB100 this summer, after its revenues dropped by 13% to £26.3m – a drop of 11 places to 93 – and its profits per equity partner slid by 43% to £134,000.
The departure of family law star and high-billing partner Helen Ward to Stewarts Law with a team of four associates and two support staff last November was a serious blow, but administrators say that behind the scenes the firm was also struggling with cash flow issues and bank debt in the face of a still unforgiving economy.
PwC’s Zelf Hussain, a joint administrator in the deal who works with middle market business in financial distress, told Legal Business in October: ‘They started looking at the cash position about two to three months ago. They were aware they needed to address this issue. They were starting to put in some changes in terms of billing on a monthly basis… they had procedures in place which actually started allowing them to get cash in from their clients.’
However, before these tightened billing processes could bite, and with the deadline to secure professional indemnity cover combined with tax bills looming, it brought matters to a head in what Hussain calls a ‘perfect storm’.
With a strong underlying book of business and clients, Manches is a ‘bargain buy’ for 164-lawyer Penningtons, which has previously secured mergers with City practices Dawsons and Wedlake Saint.
Penningtons will take some of Manches’ liabilities but will not be expected to pay them in full. The firm is also expected to look at how it can strip out costs and make the business operate more efficiently.
The newly-merged firm should have a revenue of around £60m, which will elevate it into the LB100 third quartile.
However, PwC law firm restructuring specialist Glen Babcock (pictured) pointed out that over-saturation of the legal market will continue to cause many firms serious problems. ‘All the research shows there’s too many lawyers in this country and there will be further consolidation in the market, and we’re seeing that happen. Ultimately, what we would expect is consolidation and then a reduction of lawyers over the course of the next two to three years. The business isn’t there at the level of funding required,’ he said.
In a statement, Penningtons Manches said: ‘While we cannot comment specifically on the circumstances that led up to the administration, it should be made very clear that Manches’ underlying business was and remains robust and successful. The challenging economic environment that all firms have had to deal with since 2008 has exerted different pressures on different businesses and in the case of Manches this resulted in short-to-medium-term cashflow problems.
‘Penningtons and Manches were in negotiations about merging before the issue of administration arose. The appeal to Penningtons has always been the excellent strategic fit between our respective core practice areas, sectors and clients. We can confirm that our firm is extremely well managed and financially stable. We are well known for our excellent financial stewardship and this will continue over the year ahead.’
sarah.downey@legalease.co.uk