Slater and Gordon: Heading for triumph or disaster?

Eyebrows have been raised on many foreheads at the news of Slater and Gordon's purchase of Quindell's professional services division and the initial price of £637m. However, institutional investors in Slater and Gordon's new shares, which fund much of the purchase, have been snapped up in a matter of days.

Predictions of doom about the true worth of what Slater and Gordon is buying continue and the deal has polarised opinion like no other recent legal services acquisition. One group or the other must be badly wrong,
but which?

Strategic plan

At its annual general meeting in Melbourne last October, Slater's managing director, Andrew Grech, was able to claim proudly that, with 100,000 active clients in Australia and the UK, 'there is no provider of legal services in the world with the client base
of Slater and Gordon'.

Up to that point, Slater
and Gordon's strategic plan appeared to be to build its
UK alternative business structure (ABS) base gradually, concentrating heavily on buying firms, or parts of firms, with significant involvement
in personal injury work. Firms such as Goodmans, Pickerings, and Taylor Vinters are fully incorporated. Staff from Pannone and Fentons are close to the same, with the firm's new Manchester office opening in March, housing 700 staff from various locations.

In February, Slater and Gordon announced the purchase of two more personal injury firms for £18.7m. In this context, the Quindell deal is on a different scale to what has gone before and, on its own, it increases the firm's market share of the personal injury sector from 5 per cent to 12 per cent, making it the largest personal injury law firm in the UK.

The £637m initial purchase price for Quindell has around 70 per cent (£456m) being funded through new shares and the rest via bank debt. Institutional investors in Australia rushed
to buy up the £312m of shares on offer inside three days. This illustrates the commercial advantage that Slater and Gordon enjoys over its rivals;
it was the first law firm in the world to obtain a stock market listing, in 2007.

Clearly Australian investors are more than happy with Slater's direction of travel. The current share price is A$7.55, compared to A$4.50 a year ago.

This seems like a great success story, but the background noise of concern doesn't seem to go away. It may be that this is typical 'Pommie' pessimism, although concerns about Quindell, how it operates, and some of its accounting practices have been around for a while.

The professional services division started to buy personal injury law firms in 2012 and its share price has fluctuated, sometimes dramatically, ever since. More than 500 unhappy Quindell shareholders have massed at Your Legal Friend,
the consumer arm of Camps Solicitors in Liverpool. They argue that Quindell made a number of misstatements in 2014, while its share price dropped from 660p to 30p.

Hearing loss

A review by PwC found that Quindell's accounting policies
in relation to noise-induced hearing loss (NIHL) claims were 'not appropriate'. These cases, some 50,000 plus, are at the core of what Slater and Gordon is buying.

Critics claim that 80 to 90 per cent of the NIHL claims will fail, by being statute barred, the hearing loss being declared age-related, or through major causation issues. Some analysts even expect the cases to be a net liability.

Against this runs the fact
that Slater and Gordon has a reputation for very thorough due diligence before it buys a new vehicle. In this case it seems to have spent over two months analysing files and the fee earners working on them. The firm must be acutely aware of the worries about Quindell and its purchasing record is good. Many observers still think that the move is risky and runs against a purchase strategy which was working well.

The Solicitors Regulation Authority and Legal Services Board must be watching the situation unfold with some interest. After the problems with Co-op Legal Services, they will be hoping that Slater and Gordon demonstrates that large-scale consumer ABSs
can be made to work. If the acquisition of Quindell goes wrong, then other potential entrants to the post-Legal Services Act markets may be put off and stagnation could result. If that happens, a large number of traditional solicitors may be inclined to say, 'I told you so'. SJ

Stuart Bushell is managing director at SIFA