"Buy what you know."
In the pantheon of sage investment advice, these four words come in second only to "Buy low, sell high" in their FPW (Foolishness-per-word) quotient. They are the kind of words that made Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) Warren Buffett a multibillionaire, despite his never quite understanding (and so never buying) a single share of either Intel (NASDAQ:INTC) or Microsoft (NASDAQ:MSFT).
And yet, poor me, I've never actually been able to put them into practice myself. Why? Because I'm a lawyer. And if you've ever had the pleasure of interacting with one of my (e)squirely colleagues, I think you'll agree: We don't know a lot.
Oh, we can talk. We can write. But when it comes to gauging the optimal configuration for a silicon chip, or calculating the potential market share for the latest biotech wonder-concoction, we're at a loss. (Patent lawyers excepted.) And so it was with great elation that I learned that I can finally put Peter Lynch's famous words into action. I can finally enter into Warren Buffett's circle of competence. At last, the equity-investing world finally read the following four words:
Law firm for sale
On May 21, 2007, Slater & Gordon became the first law firm in the world to float shares in an initial public offering. I use the words "in the world" for a reason: Slater & Gordon is based in Australia. Founded more than 70 years ago, S&G today specializes in commercial law, asbestos litigation, and personal injury law. In recent years, it has gained fame (or notoriety, depending on whether you sit behind the plaintiff or defense desk in the courtroom) suing such notables as Exxon Mobil (NYSE:XOM) over a gas explosion and BHP Billiton (NYSE:BHP) for water pollution.
Listed today on the Australian Securities Exchange, S&G carries a $177 million market cap. It took in $62.9 million in revenue over the past year, earning $10.7 million in net income.
As far as profitability goes, S&G grosses 46.4% on its revenue, keeps 26.9% of that before taxes, and ends up with a 16.9% net on the bottom line. Nice. (Not all of this is cash profits, however. From that perspective, the firm only generated $7.8 million in free cash flow over the past year.)
Dewey, Chetum & Howe
A column like this one wouldn't be complete without the age-old lawyer-moniker joke, but the more appropriate question for investors is: Do we buy it, and if so, for how much? Well, I have to say I'm tempted -- and not just because, as of this writing, this is the only law firm you can buy.
Trading for a P/E multiple of just 15, S&G compares favorably on price to similar businesses that you can buy right here at home. Consultant Accenture (NYSE:ACN), for example, fetches 20 times trailing earnings. Resources Connection (NASDAQ:RECN) will cost you 22 times. Stacked up against these two comparables, S&G looks cheap. At least, until you notice that earnings growth has averaged a mere 10% per year over the last two years.
The future ...
Of course, even if the price is right, I suspect there's going to be a limited market for the securities of an Australian personal injury firm here in the States. (Although the international treasure hunters at Motley Fool Global Gains will probably take a look.) What's more interesting than the stock itself, though, is what S&G's IPO augurs for the future of law firms a bit closer to home. I mean, who wouldn't want a piece of the lucrative pie at Skadden Arps, or Baker & McKenzie?
Yet for the time being, that pie remains in the oven, for the wording of American Bar Association Model Rule of Professional Conduct 5.4 seems clear: "A lawyer or law firm shall not share legal fees with a non-lawyer ..." This one line of stricture in the lawyers' self-regulatory code appears to rule out the possibility of American law firms "going public" -- at least if they intend to practice in jurisdictions that track the wording of the Model Rules.
... is nearer than you think
As any good lawyer can tell you, rules were made to be interpreted, and amended. Any day now, the United Kingdom could pass its proposed Legal Services Bill (pun intended? With the Brits, you never can tell). As currently drafted, this bill specifically permits outside equity investment in U.K. law firms. Once their cross-pond rivals begin raking in IPO cash, you can bet your briefs that U.S. law firm partners will demand the right to cash in their equity stakes.
In fact, some jurisdictions have already begun loosening the ties that bind them from entering the IPO market. Just next door to the Fool, for example, the District of Columbia Bar has adopted a version of Model Rule 5.4 that clearly permits non-lawyers to participate in a law firm's profits.
We've come to the proverbial slippery slope, folks. It's all downhill from here.
