A leading law firm consultant has questioned the sustainability of consolidator Knights’ model after its share price crashed 60% in the past two days.
Jeff Zindani said that if Knights’ expansionist strategy has failed to make mergers work culturally, “then it’s not a white knight – it’s a cost-cutting asset stripper”.
The shares started trading at 365p on Tuesday but after a profit warning this morning closed at 148p yesterday.
The warning identified the impact of Covid on the law firm, but Mr Zindani, managing director of Acquira Professional Services, said “the idea that Covid had a material effect must be challenged against the record profits in the legal sector”.
He observed that ten years ago Knights had offices in Newcastle-under-Lyme and Chester, 150 professionals and an annual turnover of around £9m.
It now has 18 offices and a turnover for the past year, he said on Tuesday, would be around £126 million. The precise number of professionals is not known but it would be at least 1,200.
Mr Zindani said Knights was attracting “small independents” who feared being left behind by an inability to invest in technology and marketing and attract talent.
“[Knights] positions itself as a low-hierarchy, high-tech, well-branded operation in which a central back office and strong software and good marketing are put to use.
“What is striking is that there is not the usual partnership policy but modern corporate governance.
“It’s very easy to see why regional companies that feel they can’t compete with regional heavyweights might want to join the club and be bought out by Knights.
Zindani identified Knights’ approach of fully absorbing and integrating acquisitions as the big problem.
“In my experience, the biggest problem with law firm mergers isn’t negotiating a deal, it’s mixing cultures…
“Cultures have to adapt for a merger to work. If they don’t, lawyers walk with the times and take their clients with them. Equity partners however are happy to put up with a culture they don’t like if it unquestionably gives them a lot more money through a favorable deal structure but what about junior partners and associates ? »
Mr Zindani added that “it is not helped, while on day one a large number of back office and support staff are made redundant. This never goes well in a law firm as questions are then asked about who’s next and “Is this ‘our’ new culture?”
He contrasted Knights’ approach with that of Shakespeare Martineau, who has a “brand house” strategy designed to keep distinct brands and cultures intact.
The Knights model, Mr Zindani suggested, was more of a “house of cards”. He said the company’s website or public statements did not clearly state what its culture was.
Financially too, a calculation of earnings per professional, adjusted for inflation, indicated that the figure was now lower than it would be if the pre-expansion Knights had simply continued what they were doing.
“The merger track can therefore only be worthwhile if it brings significantly increased profitability. And even if it is, the size has its limits. Small businesses lack resources. Large corporations lack agility and distinction. And bland marketing juggernauts are losing customer loyalty. »
He concluded, “Right now, Knights may seem like a lifeline for static regional business ventures in a tough time.
“But if Knights’ expansionary strategy is simply designed to please equity investors, and it doesn’t make mergers work culturally, then it’s not a white knight – it’s an asset stripper that cuts costs. Or, to put it more bluntly: a barbarian at the door.
Separately, Knights announced yesterday that 524 employees had elected to participate in its ‘save as you earn’ stock option program for 2022 – this happened before the events of this week.
As a result, eligible employees were invited to subscribe to options with an exercise price of 296p, ie a discount of 20% on the closing price of 370p on February 21, the trading day preceding the announcement of the plan.
The options have a contract start date of May 1, 2022 and are exercisable from 36 months. Options on a total of 1,430,251 shares were granted yesterday.