Slater & Gordon - a Case Report

Slater & Gordon - Report

In the last couple of years, S&G’s total revenues have declined. However, thanks to last year acquisitions and advertising campaign, FY 2007 should end with a strong +32% in total revenues.

To value the company we choose a rather conservative approach. We assumed that S&G would be able to continue to grow its core business revenues at 10% (as the firm was able to do in the last 5 years) for the next 7 years. We figured out that, thanks to increased complexity of personal injury litigation and the possibility of future acquisitions, the benefit of these investments would lengthen until 2014. After that, we assumed a cautious terminal value of 2% (having considered historical inflation rate and average GDP growth rate). Eventually, we decided not to consider project litigation revenues due to the impossibility to predict their outcomes and their overall low impact on the total revenues. To note that for the future acquisition revenues over the next 3 years, we opted for the more cautious multiple of x1.2 current year revenue.

In order to fund S&G targeted growth, the company could value different sources of external capital, such as:

1. Asking employee shareholders to make additional investments in the firm
2. Taking on new debt
3. Investments by a private equity investor
4. Take the company public (IPO)

The reason why S&G opted for the IPO is that this strategy is the only one that would bring enough capital to support the company’s growth strategy. Moreover, the market conditions are favorable: in 2006, there were many Australian IPOs (121) and the Australian stock market is up more than 100% during the past 3 years.

The third option (taking on new debt) was considered too risky due to the lumpiness of the company’s project litigation work and its limited collateral. The other two options left were discarded due to the unwillingness or impossibility from the employees and private investor to provide the required capital.

For its personal injury and project litigation segments, S&G adopts a “No Win-No Fee” business model. Meaning, S&G receive payment only upon successful completion of the case (the amount of payment depends on the outcome of the case). The main drawback of this model is that it requires substantial funding while the cases are in progress (internal expense of the staff, incremental expense of research, expert witnesses and other legal costs associated with each case). Since a typical personal injury case requires between 6 and 24 months to be resolved, the fees are collected only at a future time, and only if the outcome is successful. The benefit of this policy is the potential of substantial fees if the case turns out successful (estimated fee for a typical personal injury case: A$15’000).