Tuesday, 28 June 2016

Slater and Gordon: hubris, a roll-up and "work in progress"

Good article from The Sydney Morning Herald:

"The Undoing of Slater and Gordon"

Some snippets:

At one point last year it was the world's biggest listed law firm, a $2.7 billion multinational behemoth, a brand recognised by three out of four Australians. But that was before things went horribly wrong - before, as The Australian Financial Review described it, "one of the biggest falls from grace in Australian business history".

.... Slater & Gordon made world history by listing on the sharemarket, a move made possible by a change to Australian law. (Only a handful of law firms followed Slaters, and only a few have survived.)

The float was controversial, inside the firm and out. The seven most senior partners, led by Andrew Grech, and including Peter Gordon (the mercurial lawyer and custodian of the firm's working-class values, who is unrelated to founder Hugh Gordon), became multimillionaires overnight, leaving other partners feeling shut out. "It was a confronting situation to be told, 'I am worth this many shares and you are worth this many,' " one senior lawyer told Good Weekend. Outside the firm, there was much hand-wringing in the legal community about a lawyer's hierarchy of duties, which are firstly to the court and secondly to the client. Where would the shareholder fit in this brave new world of law?

Since 2007, Slater & Gordon had spent half a billion dollars on 40 firms and had become known as a "roll-up" - a company that grows by eating other companies.

Business history is littered with the corpses of bloated roll-ups, because in order to grow, they have to keep munching away, making bigger and bigger deals, which almost always proves unsustainable. In Australia, market-watchers had seen this before. The Ferrari-driving Eddy Groves, who ran around in his cowboy boots buying childcare centres for his company ABC Learning, engaged in classic roll-up behaviour before he went broke. Several analysts Good Weekend spoke to drew comparisons between Slater & Gordon and ABC Learning. Crikey has described the similarities between the two as "extraordinary".

Slater & Gordon specialises in "no win, no fee" personal injury cases. This means it does not get paid until a case closes, something that typically takes 18 months to two years. If you sell cakes, you report your revenue when you sell a cake. But how does a law firm report revenue? Slater & Gordon decided to record revenue as cases progressed (Work in Progress), estimating the likelihood of success and how much work had been done. It recorded this as revenue, even though it was yet to get any - and, in some cases, would never get paid.

There are several theories about why Slater & Gordon ended up where it is today, with shareholders wiped out, the banks at Grech's heels, and the staff, many of them in financial distress, furious. One is that the firm, as it grew to be one of Australia's top 100 companies, should have upgraded its auditors and senior finance people. Another theory is that Slater & Gordon was in trouble converting its Work in Progress and needed a big acquisition - Quindell - to satisfy the market's relentless desire for a "growth narrative".

Another is that the "gang of four" Slaters managers - who had been there most of their working lives, Grech since 1994 - were reinforcing each other's views and started to believe they could do no wrong. And then there's the sense that there wasn't anyone, in the end, who could stand up to Grech. "It was hard to say no to Andrew at that point in time," one insider told me. "The person who historically said no to Andrew was Peter [Gordon]. When Peter left, who was there to say no?"

And the last theory, of course, is that the cause is one of the oldest authors of failure, a flaw both ancient and common, one that manifests sometimes in snakeskin cowboy boots and sometimes in a suit. "I can tell you what happened," says former Slater & Gordon lawyer Steven Lewis. "One word. Hubris."

The articles in the Financial Times about Quindell can be found here.

A previous blog post about the collapse of ABC Learning Centres can be found here.

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