Slater and Gordon is one of the world’s largest law firms, but it has recently run into difficulty. Signs of problems at the company have been rumbling on for months, and now we’ve discovered that the company is formulating a debt restructuring plan.
In truth, this may not be a surprise for anyone that’s followed the story. Slater and Gordon first started trading in the UK around four years ago. In 2012, it purchased Russell Jones and Walker, and then went on to acquire the legal arm of Quindell for £640 million.
Recent changes in personal injury law have changed its fortunes for the worse, but some may say that the rot set in even before the chancellor had his say.
George Osborne is tightening the law on personal injury claims, in an aim to prevent the huge amount of claims for soft tissue injuries. This essentially signals an end to motor accident whiplash claims. The announcement came as a surprise to the industry when it was announced in November 2015, although insurance companies welcomed the news.
Some investors saw trouble on the horizon as soon as the changes were announced; Slater and Gordon’s share price fell more than 50 per cent when the story broke. It was already in trouble having misreported its accounts, a matter which only amplified the situation.
Then, in February, the company revealed that approximately 50 jobs may be lost if it went ahead and merged two of its offices. The two branches in Failsworth and Derby would close, with the company aiming to move staff to other parts of the company. It initially said that it was reviewing the property portfolio it had amassed, but now, it seems there are other problems before this that signalled deeper trouble for the firm.
Slater and Gordon is listed in on the Australian stock exchange; the company is headquartered in Sydney. The firm’s recent UK acquisitions have attracted criticism from others the industry, although the firm itself is no stranger to takeovers, having swallowed dozens of other firms since it was originally founded in 1938.
Its UK takeover of Quindell, though, was something a little different. The Financial Times went as far as describing Quindell as a “basket case”, and was quick to highlight the potential risk of a merger with the company. The Serious Fraud Office launched an investigation into Quindell in August 2015, which sprouted from a prior investigation by the Financial Conduct Authority.
Two class action lawsuits have been launched as a result of the perceived failures post-merger, as Slater and Gordon’s share price slipped further – eventually losing 90 per cent of their original value.
Beyond the obvious issues at Quindell, Slater and Gordon is a good example of the potential risk of mergers and acquisitions. Attempting to bring two organisations together is challenging enough in ideal conditions, but merging two very different corporate cultures can cause more serious issues. Sometimes, there are huge strains placed on one or both businesses as they struggle to mesh together.
Another dangerous factor in acquisitions and mergers is the failure to carry out due diligence before the two companies come together. Quindell clearly has its own set of problems, and one wonders whether the naysayers were right in speculating that this was not thorough enough in this case.
Of course, Slater and Gordon were adamant that the numbers added up, and that’s what their investors want to hear. Looking at financial performance is certainly very welcome during any merger, but this can only ever provide a one-dimensional account of the performance of a firm. In a successful organisation, there are many factors – other than the share price – that give that company real value to its clients, and that includes the way the business functions and the alignment between different teams.
Take a major business, and add a difficult merger. Then, stir in a major change in legislation that threatens to pull the run from underneath everyone. Even as we were writing this blog, the story was continuing to evolve. Slater and Gordon is now working with FTI consulting on a corporate debt restructuring plan, and on Friday 5th February, its UK CEO Neil Kinsella resigned.
So: what happens next?
What happens during a restructure?
Corporate debt restructuring is essentially a process of renegotiation with creditors, in the hope that a business can retain its liquidity in the face of unprecedented challenges.
Restructuring is not an unusual practice, but it is a last resort process, and is generally undertaken to stop the company from failing. There is no court involvement unless the company cannot reach a satisfactory arrangement on its own; in most cases, it’s in everybody’s interest to keep the company trading.
When the firm mentioned closing two of its offices, it claimed that this was part of a property review. Given what we know today, it seems likely that this is being considered as part of the wider restructuring plan.
The writing on the wall
It now seems that the trouble with Quindell was the start of something far bigger, and the change in personal injury legislation is creating a toxic situation for Slater and Gordon. All businesses would do well to heed the risks of mergers, and consider the strategic outcomes carefully to determine whether the brand is strong enough to survive.
Organisational culture is the key to business productivity, and even the smallest business can learn lessons from this. Without strong shared values, and a common set of goals, any external threats will resonate more greatly and could bring even the most successful company to its knees.