White knight or asset stripper? Knights’ model under scrutiny

Jeff Zindani

Zindani: Questions over Knights’ culture

A leading law firm consultant has questioned the sustainability of consolidator Knights’ model after its share price collapsed by 60% in the past two days.

Jeff Zindani said that if Knights’ expansionist strategy failed to make mergers work culturally, “then it isn’t a white knight – it is a cost-cutting asset-stripper”.

Shares began trading at 365p on Tuesday but after a profit warning that morning closed yesterday on 148p.

The warning identified the impact of Covid on the law firm but Mr Zindani, managing director of Acquira Professional Services, said “the notion that Covid has had material effect has to be challenged against record profits in the legal sector”.

He observed that, a decade ago, Knights had offices in Newcastle-under-Lyme and Chester, 150 professionals and an annual revenue of around £9m.

It now has 18 offices and a turnover for the past year it said on Tuesday would be around £126m. The precise number of professionals is not known but it would be at least 1,200.

Mr Zindani said Knights attracted “small independents” that were worried about being left behind by an inability to invest in technology and marketing, and bring in talent.

“[Knights] positions itself as a low-hierarchy, high-tech, well-branded operation in which solid central back office and software together with good marketing comes on tap.

“What is striking is there is not the usual partnership politics but modern corporate governance.

“It is very easy to see why regional firms who feel they can’t compete with the regional heavyweights might want to join the club and get acquired by Knights.”

Mr Zindani identified Knights’ approach of fully absorbing and integrating acquisitions as the big issue.

“In my experience, the biggest problem when it comes to law firm mergers isn’t negotiating a deal, it is blending cultures…

“Cultures must fit for a merger to work. If they don’t, lawyers over time walk, and take their clients with them. Equity partners are, however, happy to put up with a culture they don’t like if it undisputedly gives them significantly more money through a favourable deal structure but what about junior partners and associates?”

Mr Zindani added that “this is not helped, when on day one, a large number of back office and support staff are made redundant. This never goes down well in a law firm as questions are then asked about who is next and ‘Is this ‘our’ new culture’?”

He contrasted Knights’ approach with that of Shakespeare Martineau, which has a ‘house of brands’ strategy designed to keep distinct brands and cultures intact.

The Knights model, Mr Zindani suggested, was more of a “house of cards”. He said it was not clear from the website or public statements from the firm what its culture was.

Financially too, a calculation of revenues-per-professional, adjusted for inflation, indicated that the figure was now lower than if the pre-expansion Knights had simply continued what it was doing.

“The merger trail, therefore, can only be worth it if it is bringing greatly increased profitability. And even if it has, size has its limitations. Small firms lack resources. Large firms lack agility and distinctiveness. And blandly marketed behemoths lose customer loyalty.”

He concluded: “Right now, Knights might seem like a lifeline to static regional commercial firms in a difficult time.

“But if Knights expansionist strategy is simply designed to please stock exchange investors, and it doesn’t make mergers work culturally, then it isn’t a white knight – it is a cost-cutting asset-stripper. Or, to put it more bluntly: a barbarian at the gate.”

Separately, Knights announced yesterday that 524 employees have elected for participate in its ‘save as you earn’ share option scheme for 2022 – this happened before this week’s events.

As a result, eligible employees were invited to apply for options with an exercise price of 296p, a 20% discount on the closing share price of 370p on 21 February, the trading day prior to the communication of the scheme to them.

The options have a contract start date of 1 May 2022 and are exercisable from 36 months thereafter. Options over a total of 1,430,251 shares were granted yesterday.

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