Last week we covered results from Gateley (AIM: GTLY), the UK’s only listed law firm. It’s about to be joined on the market by Gordon Dadds (AIM: GOR), which is floating on AIM via a reverse takeover of Work Group (AIM: WORK).
Economies of scale
The two companies have different business models. While Gateley has made a couple of small specialist acquisitions to extend its capabilities since listing, Gordon Dadds has a more aggressive acquisition strategy. Its aim is to bring economies of scale to the industry through its back-office technology platform.
The ever-rising cost of regulation and compliance can be hard for smaller law firms to bear while remaining efficient. Which provides an incentive for consolidation. Gordon Dadds has invested over £3 million in a common shared-service platform for back-office functions. This is based in Cardiff and provides ‘big-firm resources at a competitive price’ in the words of CEO Adrian Biles. By joining Gordon Dadds, an acquired firm’s partners can focus on practising law and bringing in new clients, while business administration is taken care of by the platform.
Adrian Biles sees a twin-track path to growth. He would like to acquire one larger firm a year in the £10 – £40 million fee range, which will be integrated into the Gordon Dadds brand. Meanwhile up to four smaller firms a year could be acquired under the company’s ‘Prolegal’ model. Here acquired firms will retain their independent identities and carry on trading as before. They will benefit from reduced cost and complexity by moving back office functions onto the Cardiff tech platform, and should also see some revenue gains as members of a large network. The pond being fished is a big one. Mr Biles reckons there’s over 100 potential targets in the larger firm category and 1,000 UK law firms that would be the right size for Prolegal.
Smaller law firms typically operate as partnerships and are undercapitalised. So there’s also the comfort to be gained from being part of a larger group with stronger resources. The trick is to bring the benefits of consolidation, while at the same time retaining a professional services culture that lawyers and clients want to work in. The listing, which is due to complete early next month, will raise £18 million net of costs and leave Gordon Dadds with a war chest of around £14 million on its balance sheet.