For the past two Saturdays, Australia’s highest-selling paper, Melbourne’s Herald Sun, has led with the woes of embattled legal behemoth Slater and Gordon.
It has been strange news judgement because nothing special happened on the Friday before each splash, and neither story took the yarn anywhere new. Indeed, the story on Saturday should probably have been that Slaters shares had recovered almost 40% over the course of the week. The stock opened a further 9 cents higher at $1.22 on Monday morning.
Yes, the shares have crashed and those institutions that backed the two-for-three entitlement offer at $6.37 in March have lost most of that $890 million.
If Slaters hadn’t gone over the top paying $1.3 billion in cash for UK business Quindell, the shares would probably be trading around $4 today and it would still simultaneously have been a good story for investors and the world’s biggest listed law firm.
Instead, Slaters has become tabloid fodder, a disaster for investors, and there are now serious questions about whether law firms should be listed on the public markets.
The most puzzling aspect of the Quindell acquisition was the board’s agreement to pay 100% cash, thereby dramatically increasing the risk as borrowings soared to more than $600 million.
Slaters had pulled off more than a dozen acquisitions before Quindell, and the vast majority had been funded by issuing shares and then locking in the key personnel.
This didn’t happen with Quindell, which has quickly become the most compelling example yet as to why shareholders in acquiring companies should be a given a vote on big deals.
That’s a reform for Malcolm Turnbull to consider because shareholders are given veto writes on major acquisitions in many other jurisdictions like the UK and South Africa, but the powerful investment banks don’t like it because it jeopardises major fee-paying transactions.
Paying too much for acquisitions is the most common way that ASX-listed companies have destroyed capital over the years, but there’s never been an example quite like Quindell, which at first was welcomed by investors before the sudden implosion, as has been documented in this Crikey coverage over the course of the year:
- Have Slater and Gordon gone OTT with $1.2b UK takeover deal?, Monday, March 30, 2015
- Aussie investors love Slaters UK plunge, Thursday, April 2, 2015
- Slaters capital raising confirms unfair deal for retail investors, Friday, April 24, 2015
- Slaters ducking for cover on capital raising for insiders, Monday, April 27, 2015
- Why Slaters should have done a PAITREO capital raising, Tuesday, April 28, 2015
- Slater and Gordon could face a class action, Thursday, July 2, 2015
In terms of what happens now, the situation is quite fluid. The tumbling share price will make it hard to retain and motivate staff, and the publicity is clearly causing considerable brand damage. However, after Monday morning’s recovery, the group’s market capitalisation is back up to $450 million.
Personnel change is also underway. Bryce Houghton commenced as the new CFO last week, and former Ernst and Young CEO and high-powered liquidator James Millar has just joined the Slaters board and taken over as chairman of the audit committee.
The latest balance sheet presented on page 46 of the financial statements will be exercising Millar’s mind at the moment, along with his old colleagues at Ernst and Young, which has replaced boutique firm Pitcher Partners as the Slater and Gordon external auditor.
The current Slaters balance sheet shows net debt of about $630 million, intangibles of $1.24 billion, which mainly reflects Quindell, work in progress of $553 million and net assets of $1.43 billion.
The Herald Sun breathlessly reported on Saturday that Slaters might have paid $100 million too much for Quindell. Try $500 million, and then some, although much will depend on the legislative changes to be rolled out next year, which Slaters will no doubt strongly resist on both sovereign risk and human rights grounds.
The pressure is now on Millar and his fellow independent directors to overrule the long-serving management duo Andrew Grech and Ken Fowlie and admit they overpaid for Quindell. This should be done through a $500 million-plus write-down in February when the audited first half results are due for release.
One potential problem for Millar is his workload. It is hard to see how a Sydney-based director can come in cold to a complex Melbourne-based giant like Slaters and get on top of the opaque UK operations whilst at the time serving as chairman of three bodies — EFIC, Forestry NSW and the Smith Family — and a director of three other public companies: Fairfax Media, Macquarie Radio and Mirvac.
But with his old firm now on the job and a new CFO in place as well, the Quindell write-down should happen, especially if the share price remains below $3.
Once a board admits it has blown up hundreds of millions on a value-destroying takeover, will the questions be asked as to why chairman John Skippen and CEO Andrew Grech still have their jobs?
The only problem being, is there anyone else out there who knows how to run a giant, listed plaintiff law firm?
Angela Bell of Slater & Gordon responds: The acquisition involved another listed company, and it was therefore not appropriate to offer a mix of shares and cash to the owners (Quindell Plc shareholders). It is true to say that the majority of the acquisitions before this date had been funded through a mix of shares and cash. This was the first involving another listed company and to that end, it cannot be compared with previous acquisition offers.