The Slater & Gordon Limited (ASX: SGH) share price and Shine Corporate Ltd (ASX: SHJ) will be closely watched this morning following a report that the law firms have informally met up to discuss a possible merger.
Shares in both companies are woeful underperformers with the SGH share price losing a third of its value over the past year and the SHJ share price tumbling by around 40% when the All Ordinaries (Index:^AORD) (ASX:XAO) index gained 6%.
It's believed that senior executives of the firms, including the Slater & Gordon's chairman James MacKenzie and Shine's chairman Tony Bellas, met at a discreet café in Brisbane two weeks ago on a "date", according to the Australian Financial Review.
Marriage of convenience
Any merger will need to be done on friendly terms as the companies are similarly sized (based on their market caps of a little over $100 million each) and each would lack the resources to go hostile.
The market cap of Slater & Gordon is a far cry from its heyday in 2015 when it was pushing over $2 billion before it's poorly executive UK acquisition nearly brought the group to its knees. Slater & Gordon managed to survive but it's a shadow of what it once was and it desperately needs a catalyst.
This is why I believe shareholders in Slater & Gordon would welcome the news, although I suspect Shine's investors would be keen to attend the wedding as well given the underperforming share price.
Bulking up to fight Goliath
Slater & Gordon is the country's second largest plaintiff law firm while Shine takes third position. Both are under pressure from their largest competitor, privately-owned Maurice Blackburn.
The companies dominate the personal injuries, wrongful dismissal and class action legal cases – and there has been plenty of work in the class action front judging from the number of ASX companies being sued by their shareholders, including the big four banks like Commonwealth Bank of Australia (ASX: CBA).
However, the courts are opting to appoint one law firm to manage class actions so as to avoid the messiness of having more than one court case running at once. It's worth noting that Maurice Blackburn got that prize for the lucrative class action against AMP Limited (ASX: AMP).
Foolish takeaway
A marriage between the second and third largest legal groups would give the merged entity greater chance of winning market share, while lowering their cost base.
The outcomes of mergers and acquisitions (M&A) are notoriously difficult to predict – just look at Vocus Group Ltd (ASX: VOC) with AGL Energy Limited (ASX: AGL) – re-entering the frame.
However, if I was a betting man, I would rate the potential for a Slater-Shine tie up as higher than the average, not that you should be investing based on M&A.
There are better ways to generate strong returns and the experts at the Motley Fool may have such an opportunity as they have identified stocks that are primed to outperform in 2019.
Follow the free link below to find out more.
