Commercial AwarenessSeptember 14, 2023
Commercial Awareness Update – W/C 18th September 2023September 18, 2023
Publicly traded companies are companies that have their shares listed on a stock exchange, which allow the trading of their shares to the common public. Private Equity firms are a type of investment firm. They invest in businesses with the goal of increasing their value over time before eventually selling the company at a profit.
Global law firm Davies Wallis Foyster (DWF) has recently reached a £342 million takeover agreement with private equity group Inflexion. Under the terms of the proposal, DWF shareholders will receive 100p per share, including a special dividend of 3p per share conditional on the deal closing. Inflexion previously acquired Chambers and Partners, the legal directories company, and the conveyancing firm O’Neill Patient in 2019. Inflexion aims to position DWF as a leading provider of integrated legal and business professional services. With access to a significant amount of capital, Inflexion is well-capitalised and able to support DWF’s growth over the coming years.
Historically, law firms have been private partnerships. However, in 2019 DWF made history by becoming the first legal business to go public on the London Stock Exchange. This move allowed the firm to raise £95 million through the sale of 61.5 million new shares, providing increased access to capital and liquidity for equity partners looking to sell their shares. With shares set at 122p when trading began – valuing the company at £366 million, following a series of financial and managerial problems as its share prices plummeted to 48p last month.
In 2020, the firm departed with its long-term leader Andrew Leaitherland amid pressure on its business, further aggravated by the Covid-19 pandemic. A huge concern was its substantial net debt of £64.9 million, which critics saw as excessive for a firm generating annual revenues of £300 million. For a listed firm with thin margins compared to its peers in the industry, this level of debt was particularly worrisome. Aside from the firm’s debt issues, even before the inital public offering (IPO), critics pointed to DWF’s opaque balance sheet, lack of clear organic growth, low profitability and high partner to fee earner ratio as key concerns. Collectively, these factors contributed to a wider sense of scepticism surrounding the firm, culminating in its share price to plummet years later.
For the first time, private equity has entered into the ‘corporate commercial marketplace’, separate from its conventional focus on consumer services. Therefore, analysts believe the sale could spark further private equity interest in the legal industry. Those firms within the industry that are increasingly looking towards an IPO or external investment now have more of an impetus to do so. This is because private equity backed firms might gain a competitive advantage by significantly accelerating their growth and becoming a genuine concern for their competitors. In this rapidly evolving landscape, firms will need to carefully assess their growth strategies to secure their future success. While an IPO or external investment might offer enhanced access to capital and opportunities for expansion, it also brings about new challenges and considerations. Balancing the benefits of increased financial resources with the complexities of public scrutiny, shareholder expectations, potential loss of control, and the demands of financial reporting and regulatory compliance is paramount. Navigating these multifaceted challenges will be essential for firms seeking a path forward in today’s environment.
DWF’s move to obtain private equity investment amidst financial difficulties, which were reflected in its share price, sets a precedent for those publicly listed law firms facing similar challenges. These firms are now at risk as private equity firms may view their consistently low share prices as opportunities to extract potential value. However, Tony Williams, of Jomati Consultants LLP and former Clifford Chance managing partner, warns that private equity investments in law firms can come with a steep cost and a mixed track record. Private equity firms typically seek a substantial ownership stake in the law firm in exchange for their investment. This means that the original partners and founders of the law firm may have to relinquish a significant portion of their ownership and decision-making control. The cost of acquiring this ownership stake can be substantial, and the terms of the deal may involve additional financial commitments or performance-based incentives.
The firm’s shares rose by up to 40% to reach 92 pence during morning trading, following media reports of a possible deal. This significant increase in share price reflects investors’ optimism regarding the potential success of DWF’s deal. With just four legal service companies remaining on the London Stock Exchange, the market’s positive response hints at the possibility of private equity firms entering the legal scene, potentially ushering in a new era for the legal industry.