When Slater & Gordon completes the acquisition of Quindell PLC’s professional services division this month it will become the UK’s largest personal injury law firm and will jump into the ASX top 100 with a market value of over A$2.5 billion. This is a brief account of how Slater & Gordon expanded from a small Melbourne partnership to a large international law firm.
Bill Slater and Hugh Gordon founded the business in 1935 to service unions, particularly in workplace entitlements and claims. Their office was a small room in the Australian Railway Union’s Unity Hall Building on Bourke Street in Melbourne. Hugh Gordon was sadly killed in action in 1943 but Bill Slater went on to lead the firm for much of its early life until passing away in 1960. During this time other partners had joined and the firm made a profit of £12,248 in 1957.
By 1984 Slater & Gordon had grown to 10 partners and 125 staff before opening its Sydney and Perth offices in 1986. Australia’s first female Prime Minister Julia Gillard also joined the firm that year before moving on to politics in the late 90’s.
In 1994 Slater & Gordon revolutionised the personal injury industry with the introduction of the No Win No Fee fee structure. Under this structure clients would not pay any fee unless the case was successful. Previously a fixed commission would be paid regardless of the outcome of the case. The No Win No Fee structure was not only advantageous for clients, but also defendants, as only sensible cases were taken on by law firms – insurers and corporates would not have to spend time and money fighting no-hope cases.
An instrumental move in the firm’s history was its incorporation and listing on the ASX in 2007, making it the world’s first publicly listed law firm. Prior to 2004, Australian law firms were legally required to be partnerships or sole proprietorships – they could not incorporate. This is still the case in most countries today. Regulatory change in Australia permitted the incorporation of legal firms and allowed Slater & Gordon to raise capital from non-partner shareholders and list on the ASX.
At the $1.00 listing price the market value of Slater & Gordon was $108 million. Revenue for the 2007 year was forecast at $59 million with profit after tax of $9 million. The price to earnings multiple was 11.9x and $18 million of new equity was raised1[i]. At listing Andrew Grech was Managing Director, Wayne Brown was Chief Financial Office and Ken Fowlie an Executive Director. All three remain in these positions today and Fowlie has been relocated to the UK.
This sharemarket listing was a master stroke by Slater & Gordon. With the capital raised by external shareholders, they were able to accelerate their acquisition of competitors and consolidation of the Australia market. The firm made progressively larger acquisitions and in the process solidified itself as Australia’s largest personal injury law firm with a market share of around 30%. These acquisitions grew earnings per share significantly as they were generally able to buy the smaller law firms at attractive prices.
The big strategic benefit of getting larger through acquisition was the ability to create a market leading brand. A larger business has a significant scale advantage allowing it to spend much more on marketing than its smaller competitors. For example a small local law firm with $2 million in revenue would spend $200,000 on marketing if they directed 10% of revenues to this purpose; they can afford newspaper adverts and some radio but TV is too expensive.
Slater & Gordon currently has about $250 million in Australian revenues, a 10% marketing allocation would give $25 million to spend. This allows a comprehensive advertising campaign including nationwide TV adverts that smaller competitors simply cannot compete with. As a result, when someone requires a personal injury lawyer, front of mind is Slater & Gordon rather than the small firm down the road.
Smaller law firms find it difficult to compete with the strong brand of larger firms, so some decide to close or join them (sell out to the larger firm) rather than fight them. While Slater & Gordon has a number of competitive advantages, scale and brand are the most significant.
This brings us up to the expansion into the UK. In October 2007 the UK made similar reforms to permit the incorporation of law firms. The personal injury law market in the UK is about four to five times the size of Australia’s[ii]. Slater & Gordon could increase the size of their business many times over by snatching a 10 or 15% share of that market.
Slater & Gordon waited until January 2012 before acquiring UK firm Russell Jones and Walker. With this initial foray Slater & Gordon was poised to replicate its Australian success in the UK – by once again building scale and a market leading brand.
Three more UK firms were acquired in May 2013 followed by another in November. After a further two in late 2014, Slater & Gordon was now a large business with A$500m in revenue. About A$225m of revenue now came from its UK operations making it the third largest personal injury law firm in the UK.
Late last month Slater & Gordon announced its intention to acquire the largest UK firm for £637 million (A$1,225 million) by acquiring Quindell PLC’s professional services division. This acquisition is many times larger than any previous one and will catapult Slater & Gordon’s UK market share from 5% to 12%.
Quindell has been a poorly performing UK listed company. It has a professional services division (PSD) which consists of a large personal injury legal business and a car accident support business. It also has some other technology businesses related to the insurance industry (Slater & Gordon is not purchasing these). Quindell’s share price had fallen from a high of £2.40 to a low of £0.32 last year after aggressive accounting practices were highlighted by analysts, and its Founder and Executive Chairman was stood down after breaking director share dealing rules.
Quindell had also gotten itself into a cash crisis by aggressively chasing class action relating to industrial hearing loss cases – acting for people who have suffered hearing loss making claims for compensation against their former employers. Quindell made incorrect and aggressive assumptions about the profitability and timing of cash receipts for these cases, resulting in them taking on too many cases and running out of cash.
Slater & Gordon seized this opportunity to make a £637 million offer to acquire PSD. £40 million of this price tag relates to these troubled hearing loss cases while £597 million is for the core legal business and the car accident support business. To fund this, Slater & Gordon is raising A$890 million from its shareholders through a 2 for 3 rights issue. This acquisition is expected to be close to 40% earnings per share accretive, so adds significant value to shareholders. Strategically this acquisition makes sense as Slater & Gordon will have a clear market leading position in the UK and will be able to boost marketing expenditure.
However acquisition led growth is certainly not without risk. The acquired firm may fail to produce the expected earnings or key personnel can leave taking clients with them. The acquiring firm will conduct extensive due diligence and lock in key personnel for a number of years to reduce the chance of a disappointment. But if you acquire enough firms, even the best management teams will get one wrong eventually.
The risk with the current acquisition is that it is far larger than previous acquisitions. Following this acquisition PSD will represent a little over 50% of Slater & Gordon’s earnings. Any earnings disappointment from PSD will drag down the earnings of the wider group. Since 2007 Slater & Gordon has made the right acquisitions and shareholders have been well rewarded. But now more than ever, shareholders are relying on management’s judgement. This risk is likely to weigh on the share price while PSD integrated with the wider group.
The acquisition is not finalised yet as Quindell shareholders still have to approve the sale of PSD at a shareholder meeting on the 17th of April. There are already commitments from a number of large shareholders to approve the sale so it is likely the acquisition proceeds.
Longer term Slater & Gordon will retain attractive growth options. Market share in the UK could be increased from 12% to 20% or more[iii]. Other countries are likely to allow incorporation of law firms at some stage, including Canada and the United States. With experience gained through expanding into the UK, Slater & Gordon will be well poised to become a consolidator of those markets.
Prior to acquiring Quindell’s PSD, Slater & Gordon traded at a valuation of 17x earnings. It is now trading at only 13x earnings due to the large issue of new shares and integration risk. With non-mining Australian stocks trading at an average of 17x, Slater & Gordon offers good value.
Post the consolidation of PSD, Slater & Gordon will have annual revenue over A$1.1 billion and earnings after tax close to A$200 million. It will have offices in more than 20 UK cities and employ around 5,000 people globally. Since 2007 earnings per share will have increased from 13 cents to about 60 cents, an impressive annual growth rate of 19%. Time will tell whether they have bitten off more than they can chew or whether this is one more step on the path to a becoming a world leading law firm.
William Curtayne
Portfolio Manager
[i] Slater and Gordon Prospectus
[ii] Slater and Gordon market release 30 January 2012
[iii] Milford estimates
Disclaimer: This blog is intended to provide general information only. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment or financial advice. Under no circumstances should investments be based solely on the information provided. Should you require financial advice you should always speak to an Authorised Financial Advisor.