There’s little about Andrew Grech that says multimillion-dollar CEO. His corner office in S&G’s Melbourne headquarters is a modest, cluttered affair, and his slightly crumpled, open-neck shirt hardly seems like the attire of someone sitting on a company stake worth almost US$9 million, at least outside of Silicon Valley.
A litigator who joined S&G in 1994 from rival plaintiffs firm Maurice Blackburn, Grech diligently worked his way up S&G’s managerial roster. He spent stints running an office in the Melbourne suburb of Footscray and the firm’s small Sydney outpost before giving up full-time law practice in 2000 to become managing director. While senior lawyers like Peter Gordon mastermind the cases that have kept S&G in the press, Grech has directed the firm’s aggressive growth strategy. The aim has been simple: to transform the firm from a predominantly personal injury practice in the southeastern state of Victoria into a national business that handles cases across a variety of practices.
Founded in Melbourne in 1935, Slater & Gordon made its name and its money fighting the kind of companies it now sits alongside on the ASX. Three-quarters of the firm’s business still comes from volume-driven, relatively low-value personal injury cases. S&G has also built a practice focused on big-ticket tort litigation-long-term, high-profile, and capital-intensive cases, often fought through class actions. (Australia passed a class action law in 1992.) In the mid-1980s, S&G established its reputation in asbestos litigation, notching up Australia’s first successful claim for negligence in relation to an asbestos disease in 1985.
By the late 1980s, however, the firm was losing money, and its sole proprietor, Jonathan Rothfield, was looking to retire. A group of partners, including Peter Gordon, agreed to buy him out for just A$1 million, betting that they could turn the business around.
Those partners made good on their investment as major cases began to pay off in the 1990s. The firm landed a A$500 million settlement for 300 claimants who became HIV-positive after being given contaminated blood in childbirth and surgery. In 1996 it secured a settlement for 30,000 landowners in Papua New Guinea affected by waste dumped from a nearby mine owned by BHP Billiton. Then, in 1999, the firm won a landmark ruling for temporary dockworkers who sought compensation for asbestos-related illnesses.
With this burgeoning litigation track record, S&G decided to expand and diversify. First the partnership converted to a corporation in 2001, the initial step down the road to going public. “We were concerned that a partnership was an inefficient way of investing,” Grech says. “You distribute all the profits in a partnership, whereas in a corporate structure you can retain earnings at a much more preferential tax rate.”
For four years the firm picked up laterals by ones and twos and then, in 2005 and 2006, swallowed five smaller firms. In the process, S&G grew from 109 lawyers in 17 offices to 208 in 21 offices by early 2007. “Our acquisition strategy is focused on a broad plan to build competency and capacity in certain areas,” says Ken Fowlie, one of the three executive directors on S&G’s board and head of the New South Wales practice. Among the practice areas targeted have been family law, real estate, and commercial law. Along with building its existing offices in Australia’s commercial centers-Melbourne, Sydney, Brisbane, and Perth-the firm also wanted a network of outposts in smaller towns. “Our business works best when we’re close to our clients,” says chief operating officer Mike Feehan.
But the S&G war chest was limited, so in 2006, convinced that the firm needed more cash to fuel its growth ambitions, Grech and the rest of S&G’s management began to look seriously at going public. The firm spoke with investment bankers and private equity funds to examine the pro and cons of raising money from outside investors. “We spent hours, as an ownership group, discussing this,” Fowlie recalls. “We’d been approached by various people saying we should float the business.”
Jonathan Tooth, head of corporate finance at Austock Group Ltd., a midmarket Australian corporate finance house, met with S&G’s management to brainstorm over an IPO. “We had never looked at listing a law firm,” he says, “and when you don’t have a peer group, it makes it hard [to set a price]-but we felt comfortable with the company and its background.” The nature of S&G’s practice made it an easier business to come to grips with, Tooth says. “It’s quite different from major commercial firms like Freehills,” he says. “Personal injury is a relatively straightforward business. It’s all about systems and processes for dealing with claims.”
S&G also considered selling a stake in the business, but ultimately opted against the buyout route. Management was concerned about how much autonomy the firm would have to give up and just how much of a contribution a private equity fund would make in return for a stake. “We looked carefully at private equity, but ultimately their exit is a float, so we saw it as an intermediate state,” Grech says.
Before issuing its prospectus, the firm consulted with legal market regulators, including Mark, the legal services commissioner for New South Wales. As the Australian state with the most lawyers, NSW has been a pioneer in regulatory reform of the legal profession, the first state to implement many of the changes that paved the way to a law firm IPO. Mark gave S&G guidance on how they could become a public company and still uphold the ethical standards of the profession. Among his recommendations: a clause in the prospectus that specified that the firm’s duties were first to the courts, then to its clients-and finally to its shareholders.
With a team from Austock, led by Tooth, acting as underwriter and the lead manager of the offer, the firm issued its 100-page prospectus in early April 2007, revealing, among other things, revenues and profit forecasts for 2007 and 2008. S&G lawyers say they were unfazed at releasing details of the firm’s finances and inner workings. With a history of high-profile cases, they were accustomed to seeing the firm’s name in the Australian press, and since the mid-1990s, S&G has run television and radio advertising campaigns to bolster its brand on Main Street. “A lot of our business is in the public domain,” COO Feehan points out. “It’s not that scary.”
Grech conducted a series of investor roadshows, meeting almost 40 institutional investors to explain the mechanics of the business and the case for investing. His pitch steadily improved over the course of the road show, Tooth says. “People didn’t really understand the business,” says Tooth, “but Andrew is very good and could articulate the vision of the firm.”
Grech evidently managed to assuage many investors’ doubts. On the day of the IPO, S&G’s shares opened at A$1.32-more than 30 percent higher than the offer price-and closed at A$1.40. While the demand was gratifying, the pop in share price meant that the firm and its equity partners left millions on the table. “When they came on at [around] A$1.30, it was a little disappointing,” Tooth admits. “But the markets were very buoyant, and fundamentally I think we got the pricing right.”
Of 108 million shares, just under a third were offered on the market, raising A$15.4 million for acquisitions, A$17.3 million for the firm’s seven equity partners, and A$2.3 million to cover the costs of the IPO. Just over half of the firm’s shares-55.9 percent of the total equity-stayed in the hands of about 20 of the most senior lawyers and staff, including the seven equity partners, practice area and office heads, COO Feehan, and CFO Wayne Brown. Grech, with just over 10 million shares, has the largest holding, ahead of Gordon, who has just under 10 million.
The remaining 11.6 percent of shares were reserved for the employee ownership plan, which enables more junior lawyers and staff to buy shares in the business. The traditional ten-year partnership track no longer exists at S&G, in part because the 2001 incorporation had already abolished the partnership. Instead, under the employee ownership plan, senior associates with five or six years’ qualification who meet certain standards are given the opportunity to buy shares with an interest-free six-year loan from the firm. From a firm where the equity was held by just seven lawyers-mostly by Grech, Gordon, and Paul Henderson-approximately 60 attorneys and staff now own stakes in the business.
The employee stock purchase plan has its drawbacks. When the first tranche of shares in the plan were released to the market-these shares vest once a year at a set date-the price was at A$1.74, close to the market high of A$1.80. By early November 2008, the price was back down to around A$1.35, meaning paper losses for the employee shareholders. “Obviously it’s [a concern] for all of us that the price has moved around,” Grech concedes. “We’ve been careful to tell people that they can look at the share price every day if they want, but the best way of changing the price is by focusing on your work and contributing to the business.”
Although the share price has fallen since last year, the business has continued to grow. In September 2008 the firm announced that revenues had grown by 26.7 percent, to A$79.7 million, while profits had risen 41.8 percent, to A$15.1 million. Given its heavy, countercyclical litigation caseload, S&G would appear to be a good bet in the current global downturn.
Grech insists that he doesn’t spend a lot of time reading commentary on the firm, and he declined to comment on whether the share price fully reflects the countercyclical nature of the practice. However, recent turmoil in the financial markets have reportedly caused several other Australian law firms-principally personal injury firms-to delay or cancel IPOs. Austock’s Tooth says that his firm was working on another law firm public offering before it was shelved as the market collapsed. An upturn in the market will likely lead more plaintiffs firms to go public.
At S&G competitor Maurice Blackburn, CEO Greg Tucker says that his firm considered going public after the S&G offering but decided against the move. Partners worried about how opening the firm to an element of outside control would affect the business’s long-term future, including the firm’s ability to advocate on social issues, and they couldn’t see the need for capital. “Except for the lure of a significant lump of money, why would you float and hand control to others who may not share your vision?” Tucker says.
S&G’s answer can be seen in how it has invested its IPO proceeds. Drawing on the A$15.4 million earmarked for acquisitions, S&G has acquired ten small firms since the 2007 float, raising its lawyer count to 220. “People don’t give you capital for it to sit in the bank, you’ve got to show how you’re going to make it work,” Grech stresses. Typically the takeovers are modest deals involving practices with fewer than ten lawyers in which the handful of senior lawyers in the target get a mixture of S&G shares and cash. Today, as a result of steady geographic diversification, more than 40 percent of S&G’s revenues come from outside Victoria.
Being able to offer shares in a listed business, Fowlie insists, makes it easier to put a value on a firm to be acquired and, ultimately, to integrate it. “We can say to them, ‘Your practice is going to be worth 5 percent of Slater & Gordon, here’s a 5 percent stake,’ ” he says. “ In smaller partnerships, you may have someone who’s run their firm for 20 years, and it can be hard to say you won’t be an equal partner [in Slater & Gordon].”
For now at least, going public is purley a plaintiffs play. Australia’s big commercial firms, including the six generally seen as market leaders, largely remain unconvinced that going public would benefit them. “I don’t think it will happen at the major firms,” Freehills’s Bell says. “There’s a sense that you’re selling the family jewels, you have to become much more transparent, and we don’t need the capital.” Robert Milliner, managing partner of Mallesons, sees just one clear motive for tapping the public markets: “The only way you can justify floating is if you’re doing something transformational to your business, like Slater & Gordon,” he says.
Grech concedes that listing is not a sensible option for all firms, especially since not all firms have a need for capital to fuel growth. However, he warns that too many firms dismiss the idea of an IPO.
“In the early days people were a lot more prepared to dismiss going public, and I think that’s foolhardy,” Grech says. “To be frank, in our early meetings with regulators and other lawyers, a lot of people were pretty condescending.”
S&G may not have spawned a host of imitators, but the condescension is gone. Last April, The Australian, a national newspaper, tipped Slater & Gordon as one of the ten “survival shares for investors marooned in a sea of trouble.” If S&G continues to prosper, some of that opposition to floating just may drift out with the tide.
