Entrepreneurial law firm Slater & Gordon Limited (ASX: SGH) this morning announced it has received final approval from the UK regulator the Financial Conduct Authority for its purchase of Quindell's professional services division (PSD).
The initial $1.2 billion transaction is due to complete shortly and its merits have split investors with some in favour and some against. What's not up for debate is the transformative nature of the acquisition whether that be good or bad. So it's worth considering some arguments for and against.
For
- The business has a strong track record of executing and integrating acquisitions in the UK
- In the high volume / low margin world of personal injury law greater scale is an advantage
- The business fits nicely into Slater & Gordon's business model of employing brand power to win market share
- Quindell's PSD is reported to have some impressive claims management processing technology that Slater & Gordon may eventually harness across its other businesses
- The opening up of new revenue streams provides diversification
- The fast-track personal injury segment is reported to be highly cash generative
- Slater & Gordon is reported to be keeping the Quindell business separate to focus on efficiently handling cash generative low-level cases
Against
- At 6.9x earnings it appears Slater & Gordon paid a full price for part of a Quindell business that was struggling badly in the UK and in need of a deal
- Slater & Gordon's piecemeal approach to growing in the UK appeared to be working and this acquisition and the additional debt it brings represent a big move up the risk curve
- The purchase will also place renewed strain on Slater & Gordon's cash flow and accounting practices, including revenue recognition policies
- The purchase will destract management from other core businesses in Australia and the UK
Only time will tell if the Quindell purchase was a masterstroke or irrational folly, and the market remains unconvinced by the deal with the stock now trading at a moderate discount to the theoretical ex-rights and offer price for the capital raising required to fund it.
Although high up the risk curve it could be considered a speculative buy for those prepared to give management the benefit of the doubt over its latest acquisition. However, it's probably prudent to watch this business from the sidelines for now.
Other law firms investors could consider include litigation funder IMF Bentham Ltd (ASX: IMF) or rival personal injury operator Shine Corporate Ltd (ASX: SHJ). But I reckon there's much better businesses for investors to eye up if they have some spare cash…
