The magnitude of the ousting of listed law firm DWF’s chief executive Andrew Leaitherland today for the future of the business cannot be overstated.
Leaitherland was no technocratic leader or managerial gun for hire. It was his vision and drive that took the firm from its humble northwestern roots to make history as the first law firm to list on the main market of the London Stock Exchange just 18 months ago.
One managing partner of a top 20 law firm said: “I am massively surprised, he has been the driving force behind the whole of the DWF story, he has done a brilliant job without a lot of assets, he is a great salesman and brand ambassador and he rescued the firm from a massive pile of debt by getting that float away.”
However, despite the spectacular growth of DWF, there has always been a high degree of cynicism in the legal market about whether the firm’s trajectory was sustainable.
“No surprise that the chickens would come home to roost, there’s always been a view that there has been a lot of smoke and mirrors behind that business,” the managing partner adds.
“It’s always been seen as the Andrew Leaitherland show, so without him it is hard to see what success looks like,” they say.
Arise Sir Nigel Knowles
Leaitherland has been replaced with immediate effect by DWF’s chair Sir Nigel Knowles – one of the best-known lawyers in the British corporate legal world.
Knowles built DLA Piper from a little-known Sheffield firm to one of the largest legal businesses in the world before being appointed to chair DWF in 2017.
“Nigel Knowles is a very clever and able man with a much better track record of running a business than I have,” the managing partner says, “this time next year it may end up in a better place.”
However, the managing partner of another rival firm says: ”He’s not the answer either.
“The only similarity between DWF and DLA is their first initial and that’s where it ends. DLA are an absolute international powerhouse, DWF are not.”
How did DWF reach this position?
At the time of DWF’s float the received wisdom in the legal market was that the initial public offering (IPO) was a way to pay down some of its debt and keep its lenders onside – something that the firm consistently denied.
That the float got away was a testament to Leaitherland’s abilities, but it was always a gamble.
The firm’s debt pile looked alarming and its scramble to arrange a further £15m revolving credit facility when the coronavirus crisis hit spooked investors and sent its share price tumbling from 140p to just under 80p this week.
Today’s news has further hammered the share price, wiping 18 per cent off the firm’s value and sending shares down to 66p.
DWF’s growth strategy looked optimistic, with a bet that speedy international expansion would translate into revenue and profit from its new overseas operations.
That approach is now in tatters. The firm said today that it has “taken swift action to reduce some of the partner and new hire investment to ensure a focus on margin optimisation” in its international business.
A DWF spokesperson said the firm’s current strategy was to “focus on the significant opportunity to deliver attractive returns for our shareholders by consolidating the growth achieved to date and building an even stronger global platform centred around DWF’s Complex, Managed and Connected delivery model.”
What’s next for DWF?
DWF did not react to the coronavirus crisis by cutting partner drawings, furloughing staff, cutting pay or making job cuts.
In contrast, most other large law firms were quick to implement a range of those measures to conserve cash in the business.
DWF today said the cost reduction measures it has put in place should lead to £10m of savings in 2021 and £13.5m of savings in 2022.
However, it hinted at further actions in its statement, with its underperforming corporate group highlighted as one area of focus.
One market source suggested DWF may look at a rights issue to raise further cash, something that would further dilute the shareholdings of partners in the business.
A DWF spokesperson declined to comment on whether job or pay cuts or a rights issue were being considered.
Will partners stay onside?
One key to DWF’s future is keeping its partners onside and in the business.
Law firm floats involve partners giving up a share of the profits of the business to outside investors in return for shares which should provide capital growth and dividends.
However, with the share price in the gutter, that now looks like a bad deal.
“Their biggest worry is probably the flight risk of the partners,” the second managing partner says. “The partners will be really spooked by this.”
Partners’ IPO shares are locked-in for five years, with the first tranche released when the firm publishes its full-year results and the remaining 80 per cent released over the following four years in equal tranches of 20 per cent.
A partner at a rival firm says partners may weigh up the potential rewards on offer elsewhere as shares that are plunging in value and not paying a dividend “won’t put their kids through school or get them the bigger house that they have aspirations for”.
The dream is over
Leaitherland’s vision of DWF as the world’s next international legal powerhouse is surely at an end.
The next challenge will be digging the business out of its current hole and keeping partners and lenders sweet.
One broker says Knowles may be able to offer solutions that Leaitherland was not prepared to as the business is not “his baby”.
“It allows DWF to look at strategies such as mergers where DWF would not end up on top,” they say.
Leaitherland rolled the dice on a float and that gamble has backfired spectacularly.
The second managing partner says: “Andrew may say he was unlucky, caught out by a once in a hundred year event, but the debt is utterly unsustainable, the moment you get a blip you can’t satisfy the investors.
“The trouble with dreams is you wake up.”