The View From Up North: The Most Important Benefit of Publicly Traded Law Firms

Columnist Steve Dykstra explores the benefits to law firms being publicly traded.

A couple of weeks ago, I wrote about UK firm, Gateley. A while back it secured the second ever Alternative Business Structure license granted in the UK. That meant it was eligible to raise equity capital from the public.

It did that last week, offering 31 million shares to investors for net proceeds of approximately $57 million. That gave it an initial market cap of $190 million. Not bad for a firm with 400 lawyers. We can now create a new metric: Market Cap Per Lawyer (“MCPL”). In this case, Gateley has an MCPL of nearly $500,000.

On the first day of trading, Gateley’s shares spiked 20 percent above the initial price before settling in at seven percent by noon. I can picture many Gateley lawyers/shareholders looking up the latest quote and tapping away at their calculators, trying to figure out their rising and falling fortunes. I suspect Gateley lawyers did not bill their usual amounts on opening day.

As of yesterday, shares were still up 7 percent over the opening price.

We all know when you ask the public for investment, you have to provide some bullsh*t well thought out reasons why people should hand you their life savings. Here is Gateley’s pitch:

Greater opportunities to grow Gateley both organically and by selective acquisition – including lateral hires of individuals or teams, or of other legal firms which offer geographical expansion or specialist services

The opportunity to acquire businesses offering complementary professional and other business services

Alignment, through share participation, of employees’ goals with those of the business, aiding retention of staff and adding to Gateley’s recruitment appeal

Facilitating a more flexible career structure, further widening Gateley’s appeal in the employment market

I have no idea what “[f]aciliating a more flexible career structure” means, but it sounds like a good reason to invest to me. They all sound reasonable and, dare I say, very corporate.

Sponsored

But, here’s the biggest benefit of an IPO to lawyers. It has nothing to do with growth. Only approximately $9.5 million of the raise is going to Gateley’s stated goals. The rest, almost $48 million, is being distributed to the partners of the firm. A mere seven partners will pocket $38 million. By my math, that’s about $5.5 million per gorilla.

So, $38 million to feed the gorillas, $9.5 million to organic growth and facilitating whatever the heck they’re facilitating. I have to say UK investors are very generous to buy up shares so a bunch of gorillas can cash out. Try getting capital out of your traditional partnership while still working for the firm. Ain’t gonna happen.

So, there you go. If you weren’t sold on the public owning law firms for various reasons, you now have a time-honoured rationale to support it — greed. If the big partners at a tiny UK firm can take $38 million off the table, I would love to see what the partners at Wachtell or Quinn Emanuel could do.

For fun, let’s do a rough exercise. Gateley was valued at about five times trailing EPS. Here’s Wachtell’s financial performance from 2014:

Number of equity partners: 83

Sponsored

Profits per Partner: $5.5 million

Total profits: $456.5 million

Total lawyers: 267

In a corporate world, every partner would morph into a shareholder and get paid a salary. Let’s assume each equity partner gets $2 million per annum. It’s arbitrary, but I’ve got to pick something. Thus, subtract a total of $166 million for the cost of partner salaries from the profits. That leaves adjusted firm profits of $290.5 million.

At five times earnings, Wachtell would be valued at $1.45 billion. It would have a Market Cap Per Lawyer of $5.4 million.

Impressive. I’d invest.

That’s the View From Up North. Have a profitable week.


Steve Dykstra is a Canadian-trained lawyer and legal recruiter. He is the President of Keybridge Legal Recruiting, a boutique recruitment firm that places lawyers in law firms and in-house roles throughout North America. You can contact Steve at steve@keybridgerecruiting.com. You can also read his blog at stevendykstra.wordpress.com, follow him on Twitter (@IMRecruitR), or connect on LinkedIn (ca.linkedin.com/in/stevedykstra/).