Over the last two years, the Australian patent and trade mark attorney profession has seen a number of significant changes. The 2013 amendments to the Patents Act 1990, meant that Australian patent and trade mark attorney firms could incorporate. This led to the consolidation of some of Australia’s biggest patent and trade mark attorney firms. These consolidated firms have subsequently listed on the Australian Stock Exchange to raise capital and have since been on an aggressive acquisition spree to achieve market dominance.
- In November 2014, Spruson & Ferguson listed on the Australian Stock Exchange as Intellectual Property Holdings (IPH Limited). Since then, IPH has acquired Fisher Adams Kelly, Pizzeys, Callinans and, most recently, Cullens.
- Shelston IP publicly listed as Xenith IP Limited in 2015 and is now in the process of acquiring Watermark.
- In August 2016, Davies Collison Cave and Freehills Patent Attorneys publicly listed under the holding company, Qantm IP.
All of these activities will have a significant and long-lasting impact on the IP industry and profession.
Higher Returns for Shareholders or Better Service for Clients?
For inventors and owners of intellectual property, consolidation of the intellectual property market in Australia will have long term consequences. At the very least, the listed entities’ acquisitions of Australian patent and trade mark attorney firms is likely to impose additional pressure on the holding companies to meet investors’ lofty expectations and maximize shareholder returns.
To date, news coverage of activities within the sector has focused on firm valuations, share price fluctuations, and speculation about the financial windfall that will be enjoyed by the former partners or owners of the acquired firms. Little has been written about the interests of the acquired firms’ clients.
As attorney firms corporatize and list on the Stock Exchange, then acquire other firms, the debate about the conflict between the clients’ interests and shareholders’ interests becomes increasingly relevant and must be considered by clients.
Earlier this year, The Australian Financial Review reported that High Court judge, Justice Geoffrey Nettle, when considering the legal profession, raised concerns that accounting rules and complexities associated with the public listing of a law firm could ultimately work against the interests of clients. Justice Nettle specifically pointed out that the public listing of law firms can visit additional pressures on lawyers working for those firms.
In short, there are inherent conflicts of interest when an individual or entity is obliged to act for both clients and shareholders.
The large sums of money expended by the listed entities to secure their acquisitions is also creating unrealistic expectations among investors. As a result, there is pressure on the parent companies – IPH and Xenith IP – to find new and innovative ways of maximising returns for their shareholders.
Over the coming years, that pressure will be transferred to the attorneys employed by the listed firms. Clients may ultimately have to foot the bill for some of those acquisitions.
Keeping it in the family
The consolidation of Australia’s attorney firms has markedly reduced choice for clients.
For example, in Australia’s third largest capital city, Brisbane, there are roughly 70 registered patent and trade mark attorneys currently in private practise. Having acquired the city’s three largest intellectual property firms, over 50 per cent of Brisbane’s registered attorneys now work for the same publicly listed entity, IPH.
At present, firms which are owned by the same listed entity continue to operate and represent themselves as separate IP firms and compete against each other.
This approach allows sibling firms – meaning, firms that have the same parent, are governed by the same board, and are answerable to the same shareholders – to represent opposing parties in a legal dispute. It also means the parent company can count as clients multiple companies from within highly competitive industries such as pharmaceuticals, ICT and financial services. Clients in these sectors are typically fiercely competitive, highly risk averse, and demand category exclusivity.
Consider this hypothetical scenario: Two firms owned by the same listed entity represent opposing parties in a contentious matter. Firm A represents a client in patent opposition proceedings, while the other party to the opposition is represented by Firm B. When the stakes are high, how many clients would be comfortable knowing their adversary is being represented and advised by attorneys from the same ‘family’?
As clients become more aware of the ownership structure of so many of Australia’s large intellectual property firms, and the potential for conflicts within a listed family, many will transfer their portfolios to truly independent firms.
As noted, the acquisition trail has been highly lucrative for the equity owners of the targeted firms. The holding companies have used the currency of shares and hefty payouts to entice privately-owned firms to sell. But for non-equity partners, and senior attorneys who had partnership aspirations, the takeover may represent a career checkmate. Consequently, uncertainty and unrest is rife within the profession.
On the one hand we have director-level attorneys who, while sitting pretty on seven figure share certificates, have lost control of this chapter of their professional lives. As soon as the cuffs are off, a good proportion of these directors are expected to cash in and either check out (as in retire early), or right the wrong by starting up new private practices.
On the other hand, we have what should have been the next generation of equity partners who now find themselves without a career path and slave to the publicly listed corporation. Much higher than average lateral movement is expected within the profession – most likely, to the benefit of independent and boutique firms
As we know too well, clients are more likely to be loyal to individuals than they are to brands. Hence, the anticipated movement of attorneys from listed to unlisted firms will inevitably also result in client movements. This, too, has the potential to negatively impact upon the profits and market share.
A significant increase in the number of boutique attorney firms could be the death knell for some of the less profitable acquired firms.
Have Listed Australian Law Firms Ever Failed?
Australian law firms have failed not long after publicly listing.
Integrated Legal Holdings (IAW) went public in 2007 and into voluntary administration in late 2014. IAW failed because of its attempted aggregation of smaller generalist corporate law firms that ran on a conventional partner-lawyer leverage model. IAW tried to increase profit through economising on back office costs; and replacing the traditional partner profit incentive model with corporate governance, salary, bonuses and dividends which, ultimately, resulted in its failure.
In the past 12 months, two other stock market pioneers of the Australian legal industry, Slater & Gordon and Shine Corporate, have had 60 to 90 per cent of their capital wiped out.
One of the reasons these two law firms were able to show such spectacular growth during the initial phase of capital raising was their ability to grow earnings through acquisitions. As reported in The Australian Financial Review, both of these firms effectively engaged in “multiple arbitrage” – the process of using their own (formerly) high valuations to buy the earnings of smaller firms on lower valuations and, consequently, boost their value. However, the acquired earnings have not been sustained and the share price of both these law firms has steadily declined.
In the intellectual property space, most of the recently acquired firms have been valued at approximately seven to ten times their yearly revenue.
For example, if a listed entity that is valued at $200 million with $30 million of annual revenue (not profit) buys a firm for $15 million with $3 million of annual earnings, the increased earnings of $33 million should increase the value of the listed entity to $215 million, assuming the market still values the listed entity at around seven times the earnings.
Problems arise when the earnings are not sustained over the long term due to changes in the IP market or investors trading their stock.
If earnings are not sustained, the listed entities may need to embark on larger acquisitions which can ultimately lead to pressures on the balance sheet, forcing these publicly-listed entities to raise more equity and incur larger debts, resulting in eventual failure to meet market expectations.
The problem with Australia’s intellectual property profession is that the Australian market is relatively small and the viable acquisition options and choices are diminishing. This problem is not alleviated by the growth rate of the Australian IP market, which is relatively modest at around four per cent (CAGR; source – IPH Limited). Therefore, the parent companies will need to find new ways to meet shareholder expectations and return hefty profits.
Unlike some of the previously listed Australian law firms, the listed Australian patent and trade mark attorney entities have fared reasonably well over the last two years. However, now that the dust has settled, will the share price growth be sustained?
The question is will the corporatization and public listing of Australian intellectual property firms, and the subsequent consolidation within the sector, most benefit shareholders or clients?