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British Firms Watch Australia's Law Firm IPOs With Interest
The American Lawyer
June 06, 2007
Image: Digital Vision
Partners at even the most profitable Wall Street firms might be a little green with envy at the news from Down Under. A handful of lawyers at Australia's 140-lawyer Slater & Gordon are due to share in a financial windfall in the world's first initial public offering by a law firm. On listing, seven principals -- as partners at Slater & Gordon are known -- will each own stakes worth between $2 million and $8.5 million. (Australian dollar figures have been converted into U.S. dollars.) In total, 42 lawyers and other staff will receive shares in the new public company, which will have a market capitalization of $89.7 million.
The prospect of a Wachtell, Lipton, Rosen & Katz appearing on the New York Stock Exchange or Wilson Sonsini Goodrich & Rosati making its Nasdaq debut is still a distant one, since U.S. bar rules still prohibit law firms from tapping the public markets. But in the United Kingdom, law firm IPOs are likely to be a reality within the next few years. They promise to transform partnerships and mark another step in the corporatization of law firms. A handful of the 30 largest U.K. firms are already talking to consultants about the pros and cons of going public.
Exactly when they will be able to do so, though, is currently unclear. The Legal Services Bill, now moving through Parliament with strong support, heralds a wide-ranging shake-up in the U.K. legal market, including measures allowing outside ownership of law firms. However, the imminent change in government -- Prime Minister Tony Blair is due to step down soon -- means that the implementation date for the bill's regulations will probably slip to the 2009-10 parliamentary session and perhaps even later.
Meanwhile, Australia's trailblazers are readying themselves for a world of increased transparency and a whole new meaning to equity. At press time Slater & Gordon, a $35.8 million plaintiffs firm noted for its swashbuckling contingency fee personal injury work, was due to list on Australia's principal stock exchange in Sydney on May 21. Another firm, Integrated Legal Holdings Limited (ILH), may soon follow, although at press time its prospectus was still being vetted by the local regulator.
Both firms are taking advantage of recent changes in Australia's regulatory framework. Australia's seven states and territories have been overhauling their laws to allow firms to incorporate and to lift the ban on lawyers sharing profits with outsiders. New South Wales, with Sydney as its largest city, was the first to change its laws in 2001 and has since seen more than 500 firms incorporate. Three more jurisdictions have made similar changes, and the remaining states are expected to follow suit this year.
In late 2005 Slater & Gordon's board -- composed of three partners and two nonlawyer executives -- gave managing director Andrew Grech a mandate to prepare for a listing. Last December the final decision to go public was reached. Grech says that the increased scrutiny that comes with being listed will actually be an advantage. "We want people to participate in the firm for the long term," says Grech. "We understand that the market encourages transparency, and this instills great discipline in the business."
At press time the offer was set to be priced at $0.83 per share, with the firm looking to sell 35 million shares. Just over 17 million shares are being sold by existing partners. The remaining $15 million raised by the offer will be used to fund advertising, work in progress, the costs of the IPO -- and growth through acquisitions. (The personal injury market in Australia remains highly fragmented, with Slater & Gordon holding about 10 percent.) "The personal injury and [individual] client markets will consolidate, and we have an opportunity to lead that consolidation," says Grech. Slater & Gordon staff, including some nonlawyers, will retain more than half of the equity.
With one of Australia's highest-profile personal injury practices, Slater & Gordon is used to life in the spotlight, says Grech. "We're not unaccustomed to media attention and greater transparency," he says, "so going public is not as frightening as it might be for other firms." He doubts that his firm will have many imitators. Australia's major commercial firms, such as Mallesons Stephen Jacques, Minter Ellison, and Allens Arthur Robinson, have shown little appetite for going public. "I don't think there will be a flood of firms listing," Grech says. "Some will do it if their culture can cope with the greater transparency."
The firm that may become Australia's second publicly held law firm is following a different model. ILH is the creation of Brett Davies, a tax lawyer and sole partner of Brett Davies Lawyers in Western Australia. If it lists, ILH will be a holding company with several wholly owned subsidiaries, including law firms Brett Davies Lawyers and Talbot Olivier Lawyers and a document production Web site. The IPO on the stock exchange in Sydney will raise $9.9 million to 11.6 million, giving ILH a market capitalization of around $25 million.
Davies, who lacks for nothing in the bravado stakes, is clear on the advantages of ILH's structure. Like the partners at Slater & Gordon, he has plans for growth, but he wants to minimize the headaches of merging separate firms. "Lawyers have big egos; they're very successful, but they don't like working with each other," he says. "If we buy a small practice, we can integrate it with one of our existing firms, or they can stay as a stand-alone practice."
For those U.K. firms seriously considering listing -- none have announced publicly, although law firm consultants insist that several firms in the top 100 are considering it -- the fortunes of Slater & Gordon and ILH will provide insight into going public. "People in the U.K. will watch them eagerly," says Jeremy Black, a director in Deloitte & Touche LLP's London professional practices group. "Three to four years ago, a lot of firms said public offerings would never happen, but now people are much more interested, and a number of firms have been talking to investment houses."
The most likely U.K. candidates for an IPO are firms with high-volume, commoditized practices, such as debt recovery, real estate, and personal injury work. Other possibilities are firms that are in markets ripe for consolidation, that must support a large amount of work in progress, or that depend on a significant technology investment. One often-mentioned candidate is Irwin Mitchell, a national practice with annual revenues of £112 million ($224 million) that has declared that it is preparing itself for life in a deregulated market.
Thus far the Magic Circle has shown little interest in going public. Nearly any investment those firms need to make can be funded through existing partner capital or bank debt.
But as ILH's Davies argues, there are other benefits to an IPO besides raising capital. A publicly listed firm can use stock and stock options as a recruitment and retention tool -- a way to share some equity with young lawyers without the fuss of making them partners. While this solution seems to be yet another blow to the old ideal of partnership, Davies suggests that it might be a relief to both sides. "The path to partnership is no longer seen as such a juicy carrot," he says. "While the baby boomers wanted partnership, many young lawyers see it as a life sentence."
Of course, when businesses, including law firms, compensate their workers with equity, it is helpful if that equity is worth something. Once a firm lists, that becomes a question for the public markets to decide. Partners tend to have an understandable confidence in the value of their firms as business enterprises. It's not clear yet whether shareholders will agree.
