While initial public offerings (IPOs) have extended into practically every industry, the legal sector is still one area where IPOs still haven’t quite taken off. In fact, it was only in 2015 that Gateley became the first publicly listed law firm in the UK. However, despite the slow start — less than a handful of firms have followed suit — experts claim that the number of law firms going public will double over the next year after Gateley’s proven success; almost doubling its value and demonstrating profitable diversification.
Law firm IPOs are slowly but surely becoming a hot topic, and within the past few months, two law firms — Rosenblatt and Knights — have become the 4th and 5th UK legal organisations respectively to announce a public listing. Knights has announced a plan to increase its value to a total of £100 million.
The notable increase in the popularity of IPOs for law firms is raising a question: should law firms go public, or is it better to remain a private company? While there are many advantages within multiple sectors in going public, the legal industry is one area where there are certainly two sides to the coin.
Let’s take a look….
Advantages of a Law Firm IPO
- Outdated stock market prestige still stands
- One of the most lucrative fundraising activities
- Opportunities for growth and development
- Chance of secondary offering
- Facilitates mergers and acquisitions
An initial public offering through a stock market is still widely considered to be something of a ‘prestigious’ activity, in spite of stock market listing criteria becoming increasingly lax over the years. The act of becoming listed is still strongly associated with credibility and legitimacy; factors contributing towards the potential for high volumes of cash to be obtained rapidly. In the Rosenblatt announcement, the company confirmed that they hoped to raise £43 million — £13 million more than than raised by Gateley’s landmark public listing in 2015 — bringing total company value to £76 million.
The funds generated through an initial public offering often prove to be significantly greater than the funds that can be raised in the same amount of time through alternative fundraising means and efforts; private funding, for example. Not only does this create new opportunities for growth, development, and expansion, but it also completely eradicates the need for law firms to rely solely upon private investor funds, and the restrictions and limitations of these funds. This can result in firms becoming more adventurous, taking more risks, and creating more opportunities for success.
Of course, with an IPO, there is also the chance for a secondary offering at a later date, and the facilitation of mergers and acquisitions must also be addressed. With stock becoming a natural ‘part of the package’, law firms may find it easier to enter into merger agreements, and may also benefit from the instantaneous increase in perceived value of smaller, lower value acquisitions due to the higher share value of the acquiring business. Ultimately, businesses in other sectors have succeeded in going public, including numerous businesses in the United States, such as Facebook, which raised £16.01 billion in 2012.
Disadvantages of a Law Firm IPO
- The need for full disclosure & adherence
- Time, effort, and cost of compliance
- Equity dilution (potentially to less than 50%)
- Prohibition of ad-hoc decision making
- Doesn’t match the law firm business model?
Looking at the other side of the coin, a case could easily be made for inequality in law firm IPOs, with those at the ‘top’ more likely to benefit from going public, and those at the ‘bottom’ more likely to be frozen out. The business may benefit in terms of direct fund generation. However, the time, effort, and attention of management for reporting and compliance purposes (including the rules of public listings and stock market regulations), along with additional tasks such as managing relationships with both investors and potential investors, must all be taken into account within a public listing scenario.
In addition, it is also important to consider the natural equity dilution that comes with an IPO, which could potentially bring private ownership down to less than 50% depending on the number and value of shares offered with the IPO. Ad-hoc, in-house decision making would be replaced with a new process to involve shareholders, diminishing the amount of control the law firm retains over its operations. Once again, this can relate to the concept of those at the ‘top’ (e.g. from a financial perspective) benefitting from an initial public offering, while those at the ‘bottom’ (e.g. from an operations standpoint) struggling.
Finally, while there is no right or wrong answer here, we must consider whether the concept of an initial public offering matches the traditional — and indeed standard — law firm business model. On the whole, law firms are typically viewed as income-based businesses. Initial public offerings, however, are generally used more by capital-growth based businesses. This raises a question: what does an income-based business such as a law firm have to gain from an IPO? The answer will largely depend on the goals, motivations, and aims of the individual business. Some may benefit, while some may not.
Should Law Firms Go Public?
Perhaps one of the biggest issues affecting IPO rates amongst UK law firms is that the firms that are typically considered to be the best candidates for success are somewhat few and far between. Highly established and successful firms, for example, are generally not considered to be good candidates, as they really have no need to become publicly listed. At the other end of the spectrum, unsuccessful or struggling firms aren’t considered to be good candidates – as there is really no incentive for investors to buy shares. Middle-of-the-road law firms are those most likely to benefit from an initial public offering.
So should these ‘middle’ firms go through an IPO? It’s definitely a move to take into account. However, it’s important to remember that we are still very much in the early days of law firm IPOs, with a number of firms remaining in ‘wait and see’ mode, until more have come forward to announce a stock market listing. The successes of the initial batch of flotations will ultimately make the future more clear for law firms striving to increase capital, boost recognition, and create opportunities for growth and expansion.