Will legal partnerships go the same way as property partnerships?

Posted on: June 11, 2011

The property media is buzzing this week with the news of King Sturge (master of the industrial property – sorry American readers – real estate market) becoming a part of Jones Lang LaSalle to make a combined business with 2,827 staff.

Property Week focused on the state of the agency market with a round up of the performance of the top 60 commercial properties agencies during 2010-2011. Total UK turnover was £2.3 billion which shows a rise of 10% – not too shabby. Especially when the total number of staff employed (21.5K) rose only by 1%. Seems efficiency is a real management agenda item.

Estates Gazette, on the other hand, presented a timeline of the partnerships of the past. I felt a particular closeness to this coverage as I was personally involved in a number of the major transactions and mergers. The chart starts in 1997 when Richard Ellis (which had previously absorbed one of my earliest partnership clients – St Quintin) and the 1998 combination of the mighty Jones Land Wootton with US corporation LaSalle Partners. The fates of Hillier Parker, Healey & Baker (into US associate Cushman & Wakefield) and Lambert Smith Hampton are noted before one with which I was an integral part – the sale of Weatherall Green & Smith to French company Vendome Rome in 2001 to create Atisreal to become the largest pan-European property consultancy (which was later acquired by French bank BNP Paribas).

The chart continues with other long established partnerships – Chesterton, Donaldsons, Nelson Bakewell – converting to corporate structures and being acquired by others – often from outside the property business. Then, of course, there was the creation of a stunning multi-disciplinary partnership when Drivers Jonas merges with Deloitte in January 2010.

So the majority of the mighty property partnerships gave up their business model to embrace the corporate world, avail themselves to external finance and to nestle within the global reach of their American (and French) colleagues.

The legal market has been through a period of unparalleled change which continues unabated and with the impact of the Legal Services Act yet to even start. Will legal partnerships go the same way?

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2 Comments on “Will legal partnerships go the same way as property partnerships?

  1. You could make an argument to say that it has already happened. In-going assumption seems to be predicated on the belief that size leads to efficiency and yet the facts, as is often the case, don’t support the argument. Savills (large but nowhere near the size of CBRE) is more efficient economically (EP divided by number of people) than CBRE. Given that property is often a “local business” one might question the advantages of scale or perhaps the argument is between greater scale against the additional “frictional losses” of running such a behemoth…

    It is interesting how the media and the business press focus on “size” rather than performance. This morning on the “5-Live” Business programme there was a very interesting feature on DLA Piper, a UK firm, who evidently have become the largest legal organisation in the world. From an investment perspective what would I rather want – to be the most valuable or the biggest? Of course for a lot of organisations to become more “valuable” the most pressing strategic initiative is often to get the organisation out of, or away from “value destroying” activities – in other words to reduce revenue and make the organisation smaller. This in turn requires a rigorous and robust review of activities using appropriate value based metrics.

    One of the leading agencies in the world of real estate makes a great deal of noise in their annual report that the principal metric that they use to run their business is EBITDA. To my mind a metric so mis-aligned with value creation that I am almost lost for words. However don’t listen to me; the planet’s most successful investor, Warren Buffet described EBITDA as follows –

    “…Such borrowers found even the new, lax standards intolerably binding. To induce lenders to finance even sillier transactions, they introduced an abomination, EBITDA…Using this sawed off yardstick, the borrower ignored depreciation as an expense on the theory that it did not require a current cash outlay…Even a high school drop out knows that to finance a car he must have income that covers not interest and operating expenses, but also realistically calculated depreciation. He would be laughed out of the bank if he started talking about EBITDA.”
    Warren Buffett – The Essays of Warren Buffett (John Wiley and Sons)

    So on the one hand we have the annual report of one of the leading real estate agencies in the world (you know who you are!) and on the other we have the wisdom and insight of Warren Buffet – the most successful investor on the planet (by some distance). Whom should one believe? For me it is not a difficult choice but I will leave you to draw your own conclusions.

    The reason to mention this is that if the governing objective (what the strategy is seeking to maximise) is maximising EBITDA or Earnings per share (say) then mergers and acquisitions often “seem to make sense at least at an initial financial level.” It might also explain why so many acquisitions subsequently fail to add value for the shareholders of the acquiring company over the medium term…

    The proposed merger between the excellent firm, King Sturge and Jones Lang LaSalle will no doubt be a financial jamboree for the “partners” but if it is to work and add value over time it might require more “management,” business sophistication and dare I say it “strategy” than a wise man on a Clapham omnibus might reasonably expect…

    Roger Bell – 13h June 2011

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