By Peter Frankl.

We’ve had two recent reminders that for all the benefits it has to offer, an ASX listing for professional services firm can’t seem to change their fundamental nature.

The main benefit of an ASX listing is arguably access to capital. The typical state of affairs of professional services firms and law firms in particular is being cash starved. Funds have a natural gravitation towards partners’ personal bank accounts rather than long term strategic investments in the business.

When a firm has the sudden pleasant shock of having a lot of funds at its disposal, thanks to shareholder investors, it often does not resolve typical problems but amplifies them. Here are two recent examples:

Merger Management

Xenith IP listed on the ASX in November 2015. Its first six month earnings report to December 2015 was extraordinarily good. It was so good that there was a feeling that it would be hard to top by other listed companies in the legal sector and hard to top by Xenith itself. Xenith had profitability but it didn’t have size. So it fixed that. 

After a number of acquisitions it scored the big one, acquiring Griffith Hack, a firm which was close to 1.5 times the size of Xenith. This acquisition was announced in April 2016. Then this announcement in October 2017:

Financial performance in Q1 FY18 has fallen short of expectations at both the revenue and EBITDA line. The under-performance is largely within Griffith Hack, and is influenced by several factors:

· the disruption of the transaction and the need to bed down new practice group structures and reporting lines;
· the need to rebalance current capacity against current and anticipated workflows; and
· foreign exchange headwinds (across the board).

We expect to see an improvement in results throughout the remainder of the year as the acquisition is further bedded down, but do not expect to recover this one-off shortfall in the 2018 full year results.

Xenith IP’s CEO Craig Dower added:

We are in the midst of implementing a number of business improvement initiatives across Griffith Hack and the group as a whole, which will drive performance improvement across the Company. We are also making continued progress on the integration project and we will have a more detailed update on that plan for the half-year results presentation in February 2018.

Rainmaker Exits

McGrath is an ASX listed real estate services business. Although it is not a law firm, it has one important feature in common: its success relies on talented people performing direct services for clients, i.e. professional services. The company has had a tough first four months of 2017/18. It attributes this to “several factors” but “largely in Company Owned Sales”. Income from its independent franchisees is holding up but its own real estate agency is struggling:

McGrath has completed the first four months of trading for FY18 and the Company’s financial performance has fallen short of expectations at both the revenue and EBITDA levels. The underperformance is largely in Company Owned Sales … 

In January 2017 McGrath announced that it had experienced a net departure of 36 sales agents from its company owned offices. Some of these were key rainmakers. They didn’t retire from the real estate industry. They went into competition with their old firm.

An ASX listing might even encourage the loss of rainmakers because the loyalty ties to the founder are broken when the ownership is transformed into a public company. 

Thus we have more evidence that a public listing does not change the fundamentals of professional services firms but rather amplifies them. 

© 2017 Legal Practice Intelligence