As DWF positions to float, Hamish McNicol asks if the legal IPO is going mainstream
Eversheds Sutherland co-chief executives Lee Ranson and Mark Wasserman recently hosted more than 700 partners at the firm’s partner conference in New York.
On the agenda was building a consistent culture, investing in innovation such as Idea Drop – an app that allows its 5,000 employees to pitch new ideas – and that the firm was going to float publicly. Well, not quite.
‘We did joke that we would announce we were listing but shied away from it on the day,’ Ranson told Legal Business.
It is a shame, because the pair’s timing would have been perfect: legal listings have been in the spotlight as more come to market and others quietly admit to testing the water.
The vastly-inflated £1bn price tag touted alongside DWF’s confirmed plans to float has only increased interest, and seen more than one eyebrow raised.
As Ranson puts it: ‘It is a topic that partners are talking about because they’re seeing it in the press, but I wouldn’t say we are being pressed by our partnership to look at it actively.’
Wasserman then chimes in with what is becoming the biggest question: ‘Some people wonder who would possibly invest in a law firm?’
News in mid-June that top 25 UK law firm DWF planned to list on the London Stock Exchange later this year is seen as a milestone for the industry.
Momentum had already been building, with four of the five law firms to go public having done so in the last year, but this would be the biggest by some distance since Slater & Gordon’s listing on the Australian Stock Exchange more than a decade ago.
‘I’ve never understood why a law firm would be attractive to an investor. I don’t know how you get long-term value out of it.’ Simon Levine, DLA Piper
DWF initially denied reports it would do an initial public offering (IPO), but within an hour the firm had changed its public position. The £1bn price tag was quickly dismissed, given DWF’s 2016/17 revenue of £199.3m, with profit last year slightly down to £43.5m from £45.5m. A valuation in the £400m-£600m region is considered more realistic.
Although turnover was up about 8%, a float would also focus on the firm’s borrowings, which have increased in recent years to currently exceed £40m in bank debt, a relatively high level for a law firm.
DWF had also brought in Sir Nigel Knowles as chair last September – the former DLA Piper figurehead who was known to have been interested in taking the legacy DLA public before it instead opted for a three-way US merger.
Reactions from former DWF partners include: ‘what the hell is going on?’; that chief executive Andrew Leaitherland has just gone ‘all in’; and that a float would be a way to wipe the debt slate clean. One said that the firm had looked at listing three years ago but decided against it.
DWF’s news was shortly followed by reports mid-market pace setter Fieldfisher was also considering a float. While the firm was adamant it did not have any plans to list, its official line also noted it was ‘constantly considering a range of options and opportunities’ to achieve its objectives.
Law firm leaders interviewed to by Legal Business keep coming back to the deal breaker for investors of balancing their interests with that of law firm partners, however. DLA’s chief executive Simon Levine (pictured), for instance, comments: ‘I’ve never understood why a law firm would be attractive to an investor because it is such a human resource-intensive, short-term business. I don’t know how you get long-term value out of it.’
The managing director of legal pricing consultancy Validatum, Richard Burcher, has worked with a number of firms interested in listing, and some which have. He said a listing of a larger firm, such as DWF or Fieldfisher, could be a ‘tipping point’ for the market.
Staffordshire-based Knights’ June listing was the largest legal IPO to date, raising £50m at a valuation of more than £100m. The first, Gateley, raised £30m at a similar valuation in 2015.
Burcher comments: ‘If one of the big ones go, that could, if not open the floodgates, drive those that have been keeping their powder dry.’
However, he says professional services were generally unsophisticated in their pricing models compared to sectors like retail and manufacturing, using a cost-plus model that added a margin to costs, rather than value-based pricing that priced on value for clients – ‘the stuff you cannot Google’.
Firms looking to list needed to get their house in order across a range of areas from regulatory and compliance to the balance sheet, Burcher argues, claimed that but many law firms would need to reinvent their pricing.
‘With cost-plus there is no incentive to drive efficiency, invest in technology, or do anything, because you’re always just adding a mark-up. Saying to the market “I’ve been in practice 25 years and I’m worth £500 an hour” just doesn’t work as it used to. Any prospective investor needs to be able to look under the bonnet and say: “Yes, it’s all squeaky clean and the motor is purring.”’
Burcher argues, however that there was a lot of investor interest because law firms continued to be profitable, and thought it was too dismissive to question why anyone would ever want to invest in one.
‘I don’t think it is a case of whether it is smart to invest in law firms or not.” It’s: “Is it smart to invest in this firm?” In some cases the answer is an emphatic yes, others an emphatic no.’