• Keith Wells

Has DWF ruined law firms listings for everyone?

One of the dangers in blazing a trail is that you might be the one to catch fire. The interest and discussion generated by DWF’s plans to list on the London Stock Exchange has now been matched by that around its subsequent performance.

No wonder: the share price has dropped from 122p at the time of its listing to 56p at the time of writing (which in itself is something of a recovery from an all-time low of 49p last week). The valuation of the firm has slumped from an initial £366m to little more than half of that today. The CEO who drove the firm’s growth from a regional player of £34m fees into an international business with revenues ten times that, has been made to stand down. And the firm recently announced that it would close or substantially reduce four of its international offices, while making 60 staff redundant.

The implications will extend far beyond the reaches of DWF. We know that other firms were considering similar flotations, and will take this opportunity to learn at someone else’s expense. There seems to be a lot to learn.

Has DWF spoilt it for everyone? Will another firm want to risk losing so much: not just financially, but also in personal and ‘corporate’ reputation? Will investors want to buy into a law firm? We suspect the answer to all three is “no”. The worlds of the law sector and the public stock exchange seem incompatible, so perhaps we should think in terms of “There but for the grace of God” rather than a regretful “There goes that plan”.

Why would an investor be attracted to a law firm? On first sight, a margin of 31% suggests a highly profitable business. But that is not enough.

Investors look for other factors, too. What sort of growth can the business look forward to? That can never be assured, in any sector, but many other types of business have far more robust models, client/customer relationships and revenue streams to give greater reassurance of future earnings. DWF was relying heavily on its estimates for international expansion and its Connected Services business, as indicators of future performance. When neither seemed to be returning the sorts of numbers required, it was inevitable that questions would be asked.

In the absence of reliable future indications, how about the present strengths? Investors want a strong balance sheet and a stable business. The legal sector is anything but stable: its business models and structures are under threat; and as any firm’s assets are its clients and its Partners, both of which might move at any time, current strengths cannot be taken for granted.

Cash is another problem area. The sector operates to norms that will make investors nervous: not only the 4-month average lock-up, or the fact that many firms make close to 90% of their profit in the final month of the year, but also the tendency to distribute almost all the annual profits back to the Partners.

What about ‘brand value’, or market positioning? The most valuable businesses are clearly defined in their sector, and have been committed to years of investment in reinforcing that position. We cannot say the same for the law sector, where too many firms are “me too’s” but think they have some kind of differentiation and leadership status.

Why would a law firm want to be listed?

The obvious answer is for access to capital. And the chance to earn even more money, of course. But even here the principles are debatable, and the DWF example salutary. Firms need capital to invest in areas that they believe will secure growth: IT, acquisition of complementary firms or other business providers, and international capabilities are the most common targets.

Those decisions are difficult enough in the collegiate atmosphere of a Partnership. A full listing on the London Stock Exchange exposes any business to intense and constant scrutiny. The level of detail and transparency required is something that most firms are simply not used to – and, possibly, not capable of. From both an operational and cultural perspective, the standards demanded of a PLC are not the way law firms have traditionally grown up.

Rather than an annualised basis, precise quarterly statements of all business indicators are a requirement. Projections need to be met and/or updated constantly, and the markets are very quick to notice anything they feel might be ‘misleading’ – and to raise those as serious issues.

Partners rightfully consider themselves owners of the firm. They are used to a collegiate system of decision-making, even if many firms have moved to a slimmer decision-making governance structure. In becoming a PLC, those structures and systems change: Partners will feel a significant difference in being more like an employee and a shareholder, while the big, strategic decisions are taken by a PLC board.

Some of these factors again combine in the DWF case, and the issue of “earning even more money” raises its head. It’s a matter of record that some Partners felt disempowered by the “remote” leadership figures. Then add the fact that Equity Partners agreed to reduce their total compensation by 60% in exchange for a range of future earnings that might far outstrip their current package. That was a huge leap of faith.

When we put that together with the decline in the firm’s valuation, from the initial (optimistic) £1bn, to the flotation value of £366m, to the £140m point it reached recently, the potential for personal and collective grievance is increased massively. “A few people have done well out of this” is a common reaction.

So, has DWF ruined it for everyone? We think not. If it means that firms look for more sustainable and realistic ways of funding growth, perhaps they’ve done everyone a favour?

(This first appeared in Legal Week on 8 July 2020)

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