National firms have traditionally paid little attention to small and mid-sized companies in Western Australia; this market segment is predominantly the domain of local law firms. But the boom in the energy & resources sector - and in its slipstream the construction industry - has meant that local firms find that their small corporate clients are suddenly not so small anymore
Making the trip from the airport to downtown Perth is enough to make you realise something remarkable is going on here. Cranes abound and brand new suburbs sparkle in the hot Western Australian sun. Our taxi driver claims that some of them have been built in only three months.
The demand for raw materials has sent the WA economy into overdrive; economic forecasters predict that the boom will continue for at least another five years, even if the Chinese economy comes to a halt. There are so many major investment projects underway - figures of A$164bn in scheduled projects are mentioned - that the economy is likely to maintain momentum. The only real threat is the lack of labour forces to carry out all the work.
Local law firms are among those who have profited from the booming economy. Steinepreis Paganin advised last year on the largest number of IPOs, according to research by Connect 4. The firm advised on 55 floats, which represents 20% of all new listings announced to the market in 2007.
They are not the only Perth firm with a strong representation in IPOs; colleagues at Blakiston & Crabb and Price Sierakowski were respectively number two and three in the list of firms with the largest number of public listings behind their name. The large representation of Perth law firms in this list reflects the strong momentum in the energy and mining sectors, which together are good for 61% of all listings.
But even the buoyant WA economy is likely to experience some hiccups from the sub-prime crisis in the US. As it becomes harder to borrow money, the expectation is that the stock market will see fewer listings and less private equity activity. February is normally a popular month for listings on the ASX, but this year only 12 IPOs are scheduled, compared with more than 50 in the same month last year.
"I think people are a bit more realistic in terms of delivery and turnaround," says Jonathan Murry, partner with Steinepreis Paganin. "Not that people did IPOs because they could, but during calendar year 2007 there certainly was plenty of money around. For some people it may be more difficult to close the offer."
But he is not concerned about a possible drop-off in listings. "Many of our clients are still committed to [listings] and think that they can be closed successfully. Yesterday, I saw in this office three new instructions relating to possible IPOs." Roger Steinepreis, partner in the firm, adds that while the firm has built up a strong reputation in listings, it offers a much wider range of corporate services.
Craig Readhead, partner with incorporated firm Pullinger Readhead Lucas Lawyers, agrees that theirs will be a move towards higher quality listings. "The fundamentals in the resources sector remain the same," he says. "The sub-prime crisis has affected sentiment and the positive sentiment will return, but with a greater focus on companies with quality assets.
"[Last year] there was a lot of rational exuberance going around and there was financial support for companies with marginal assets and a very short-term view. When that sentiment changes, people look more closely at the fundamentals of the business. Bear in mind that of every 100 exploration businesses, only five or 10 will succeed in terms of getting a mining project up and running, and creating cash flow to sustain a viable business."
Growth spurt
The booming economy in WA has seen the emergence of a strong local business community, consisting of small to medium-sized energy, mining and construction companies. As the economy expanded, so did the businesses, which have since become an attractive market segment for lawyers.
Traditionally, the national firms have not focused their efforts on this segment, which made some lawyers feel that they were missing out on opportunities. Over the last 10 years, several corporate boutique firms have emerged in Perth, headed by disgruntled partners who have broken away from national firms. Examples include firms such as Cochrane & Lishman, which was established by ex-Mallesons partners Ian Cochrane and Michael Lishman and Wright Legal, which consists mainly of former Freehills lawyers and is led by Paul Wright. With the resources boom in full swing, many of its clients have seen substantial growth.
"We've worked on A$9bn worth of M&A deals since we've started," says Michael Lishman. The firm has five partners, four of which are former Mallesons lawyers, and the other is from Allens Arthur Robinson. "We could grow more if we could find more quality people, but at the moment we do have the critical mass to service our clients."
Cochrane & Lishman has many clients in the resources industry, but also focuses on media, infrastructure and contractors. It has been involved in some high-profile transactions, such as the takeover of Jubilee Mines by Xstrata, valued at A$3.1bn and it recently worked on the merger of Copper Co and Mineral Securities, a cross-border deal worth A$550m.
Lishman says the sub-prime crisis in the US will not necessarily lessen the stream of work coming in, but will change the character of the work. The fall in share price of some mining exploration companies creates opportunities for others, he says. "There will be some deals that will be opportunistic, where people with cash on the balance sheet will see bargain basement prices to pick up these companies." Lishman also expects insolvency practitioners to start calling soon. "Cash is just a lot harder to come by and some will run out of cash," he says.
John McLean, CEO of Jackson McDonald, agrees with Lishman. "We haven't seen an impact [from the sub-prime crisis] so far, but it would be na9ve to think that it won't. It's more difficult to raise funds and this will mean a slowdown in corporate transactions; however, we probably won't feel it for another few months.
"We're in the centre of a storm," says Dean Hely, partner with Lavan Legal. "There are still a lot of big projects planned, but the question is whether the lack of funds will put a squeeze on those projects." But he says that the first signs of a downturn are yet to reveal themselves. "We haven't seen much small scale litigation matters, which is common when the market is in a downturn," he says. "I'm not ready to predict a downturn just yet."
Jackson McDonald and Lavan Legal are the only two large independent firms. Lavan Legal had a stint as a franchise of Phillips Fox before it merged with Bennett & Co to re-emerge as an independent firm in 2006. The firm focuses predominantly on litigation, having acted in the Westpoint litigation and the Sons of Gwalia case, but also has its hand in energy & resources work. It boasts 19 partners and approximately 100 fee-earners, making it one of the largest firms in Perth.
"WA customers come to us because they're slipping between the gaps," says Hely. "Large firms focus on the large corporations, such as BHP Billiton, and not on the mid-sized local customers who have perhaps A$6m in legal spend."
After having established a firm reputation in the WA market, Hely is eager to raise the firm's profile on the east coast. He estimates that 15-20% of the firm's clients are based there. Among them are St.George Bank and Home Building Society, which was recently acquired by Bank of Queensland but is based in WA. "We're not planning to open an office [on the east coast], but we want to get our brand known."
Last financial year was a good year for Jackson McDonald. The firm saw a revenue growth of 17%, driven by expansion in the corporate and IP practices, and was named Perth law firm of the year at the 2007 ALB Awards. "This year, we see continuation of that growth," says CEO McLean. "Up to December we had 15% revenue growth."
The firm also has a substantial insurance law practice and McLean says that after years of low activity following the tort reforms, he is starting to see the sector pick up again. "Rates are going up," he says. "The outlook is very promising and I wouldn't have said that a year ago."
Rising rates
The rapid expansion of the WA economy and the chronic lack of labour forces have resulted in a jump in costs across all industries. For example, Perth faces a significant lack of office space, which has sent rents sky high. Cochrane & Lishman is located in the London House on St. George Terrace, a building with a rather grand reception hall and equally grand rental prices. Michael Lishman estimates that the rent is now two-and-a-half times the price it was when the firm first moved in in 2006.
The shortage of experienced lawyers has also driven up salaries, adding to the cost pressures on law firms. As a result, law firms have increased their charge-out rates by 15 and 20% on average in the last three years.
At the top end of town, increases are even more significant, says Ian Cochrane. "We started at a rate that was intended to be higher than anyone else in town, but rapidly the market moved ahead of us." He estimates that the average partner rate in M&A practices have jumped from about A$450 an hour in 2005 to close to A$600 at the beginning of this year.
The rates charged in Perth are now approaching those charged in Sydney, but Cochrane does not expect to overtake those. "Sydney is Sydney, they'll still do the biggest deals," he says. "Money will move there before it will come here."
Cochrane & Lishman advises WA-based clients on high-end M&A work. Lishman says the firm has found little competition from national firms, because commercial conflicts often mean they can't act for these clients.
"Our strategy is to target Perth-based mining companies. That, we see, is a niche that isn't being serviced well by the national firms," he says. "The founding philosophy of large firms is to avoid conflicts," adds Cochrane. "They often can't act for WA clients because of conflicts."
Lishman says this is reflected in the growth of Perth-practices in these firms. "The large firms haven't made large partner numbers," he says. "I always had a list in my mind of who form the competition, but it seems that they're either moving away or retiring. So, while there might be some concern over the global credit crunch, there isn't a massive oversupply in the market. If you keep your overheads down, there's no real problem."
Many law firms pass the higher costs on to clients, but John McLean of Jackson McDonald says that is not always possible. "Often you get locked in to long-term contract positions, panel positions, where the rates are fixed for a period of time, or there's a fixed escalation on those rates. In those cases there's a fair amount of margin squeeze."
But where the firm has been able to pass on the costs, clients have reacted with understanding, he says. "Generally they've been tolerated by clients and I think clients understand, because they're in exactly the same position if they're operating in WA. It's not just the legal profession that's enduring these cost increases, it's right across the industry sectors."
McLean estimates that he has increased fees by 10% on average in the last 12 months, which has brought the average partner rate to A$450-500. "I think what we'll see is a greater range of rates. I think previously partner rates and other rates were in a reasonably narrow band, but what we're seeing now is that that band is getting stretched. I think the rates in the commercial rates have probably grown more quickly than the other areas."
Hely says Laven Legal's cost base has not increased dramatically. "We were fortunate that our lease came up before the market changed," he says. "We also have higher staff retention [than the industry average]." He adds that the last hourly rate increase in the firm was in June last year - but it was not substantial, he says. The top rate in Laven Legal is charged by special counsel Martin Bennett, who charges A$555 an hour.
BANK OF QUEENSLAND
The proposal to list ILH on the stock exchange was received with shock and horror in the Perth legal community, but as the dust starts to settle, the firms in the group have embarked on their expansion quest.
Talbot Olivier has bought two legal practices, which are absorbed by the firm. Brett Davies Lawyers is still exploring the possibilities, but says it has been approached by over 100 organisations, legal and non-legal, and even by companies in the UK.
"We're looking for Australian partnerships of six to 25 partners in Victoria, NSW and Queensland," says Brett Davies, partner of the firm that carries his name. He says that many legal practices operate on relatively low margins and have much potential for efficiencies. "We aim for a 40% profit margin."
Davies is a confident man; he is full of enthusiasm about the new legal group and is not afraid to answer any questions one might have about the realities of being part of a publicly listed group. He is also ambitious and plans to expand his Perth tax practice into a multi-disciplinary national firm.
But apart from raising money for acquisitions, an important reason for seeking an IPO was to have more options in retaining staff, says Davies. The firm is now able to offer sign-on bonuses in the form of shares in the business. This is not only an incentive for new talent to sign up, but also creates loyalty among staff, believes Davies. "Research has shown that if employees hold even the slightest amount of equity in a company they're more committed," he says. For that reason the firm also offers salary sacrifice programs for employees to purchase shares in the business for a maximum amount of A$1,000 a year.
The listing of ILH is in part intended to overcome the problems the partnership model inhibits. "In my young days you weren't a real man until you were a partner," says Davies. "Now it's different; one lawyer said to me that partnership was like a noose around his neck. Partnerships have been around for 900 years and are slowly dying. We have to have a look at new ways of running a business and ILH is the best way we've found."
HOME, SWEET HOME
When it comes to attracting legal talent, Perth has long been at the end of the food chain. Sydney and Melbourne might lose people to overseas destinations, but Perth has been losing people to the eastern states, as well as to the UK and US. However, this is slowly changing. The energy & resources boom in Western Australia has meant that the quality of work on offer in the state has improved significantly, and lawyers who have finished their overseas stint don't feel they have to go to Sydney or Melbourne to make use of their newly gained skills.
Gaelan Cooney is one of those lawyers. He left his job at Freehills in Australia in 2001 for a role with Allen & Overy in London. In August 2006 he returned to WA for a partnership with Wright Legal in West Perth, a boutique firm established by former Freehills partner Paul Wright in 2000. The firm focuses on high-end banking & finance work, acting predominantly for borrowers.
Cooney says he made a lifestyle choice. "At Allen & Overy, I didn't see that the senior partners had a lifestyle vastly different from the junior partners, the senior associates or the junior associates. They continued to work very hard and be on call for their banking clients."
A contact at Wright Legal suggested he apply for a position with Paul Wright, who at the time had a partner departing the firm. After 18 months with Wright Legal, does Cooney's initial vision of working in a boutique firm correspond with the reality?
"Yes, it does," says Cooney. "For instance, we don't have budgets. That's because when work comes in the door, you know how busy people are. You know the work that you're giving to the associates. It certainly matched my expectations in terms of what the firm had to offer."
He also says that the composition of the client base of the firm ensures a good balance between work and private life. Acting for borrowers means he no longer has to work all-nighters churning out lending papers. "You're acting for a client of the bank and the bank has to be nice to the borrower."