Over at Money Morning Trader, we don’t issue specific trade recommendations.
Instead, we look at the background of listed companies and profile their stories. This provides information on useful trading ideas and charts for your own study and risk analysis.
There’s an old fable about the high cost of litigation.
Two men were walking along the beach when they spotted an oyster. They both wanted it and each man declared ownership. They were about to come to blows when a lawyer came along and offered to solve the problem.
The men gratefully accepted his offer and waited for his decision.
The lawyer bent down and picked up the oyster. He opened it, popped the juicy morsel into his mouth and then handed each man half of the shell.
When people speak about lawyers, one of the first things that comes to mind is that they’re highly paid individuals. You can picture meetings where sage advice is given in plush offices with oak-panelled walls.
Most law firms are privately-held partnerships.
Slater & Gordon made legal and corporate history
In 2007, Slater & Gordon Ltd [ASX:SGH] boasted legal and corporate history as the first law firm to go public and list on the stock market. It soon became a market darling. The share price rose more than fourfold in the three years until 2015.
That year, Slater & Gordon announced revenue of $521.9 million. It produced EBITDA of $121.6 million at a healthy margin of 24.5%. Profit and revenue seemed sufficient to cover net debt of $623 million that gave the company a gearing ratio of 43%.
Then things began to unravel.
The company made an ill-fated decision to further expand offshore with the purchase of assets from the UK’s Quindell business for £637 million. The deal was wrapped up in May 2015 and Managing Director Andrew Grech called it ‘a once in a generation opportunity’.
A few months later in August, Quindell revealed a large scale of accounting inaccuracies in prior years. The UK’s Serious Fraud Office announced an investigation into the business.
Slater & Gordon was forced to write down the value of its Quindell assets by £450 million. Lenders demanded a quick solution. The UK assets were stripped out and transferred to an entity wholly owned by the company’s senior lenders.
The stock is now a shadow of its former self. After reaching a valuation of $2.8 billion in 2015, the market cap is now $137.6 million. The company is attempting to rebuild and focus on its Australian operations. It reported a net loss after tax of $10.3 million for the half-year to 31 December 2018.
Another group of listed law firms operate in a specialised field.
People and businesses that come up with valuable new ideas need protection from others who might steal them. The legal term for this type of protection comes under the umbrella of intellectual property.
There are four types of intellectual property (IP) under the law.
Most inventions and new ideas start out as trade secrets. These are not registered with a government body and all you need to do to establish a trade secret is to treat it like one.
Ideas covered in mediums including books, movies, photos, articles and software are all protected by copyright. It can be registered, but it’s also automatic and lasts for a long time. Protection by copyright now lasts for the author’s life plus 70 years after death.
Trademarks protect the name and style of a brand associated with a product or a service. No other company is allowed to use Coca-Cola’s name, the style of its bottles or its Coke nickname.
Patents protect the functional aspects and design features of new ideas. They follow complex procedures and are more expensive to obtain. Depending on the type of patent, they have a limited term of 15 or 20 years.
Three listed groups intellectual property law firms on the ASX
There are three listed groups of intellectual property law firms on the ASX. Between them, they hold around 52% of the IP market share in Australia. They’re all involved in a battle to consolidate the market.
The largest is IPH Ltd [ASX:IPH]. It’s a holding company for various intellectual property companies that offer a wide range of services and products in the field.
These companies include Spruson & Ferguson, Practice Insight, Pizzeys Patent and Trade Mark Attorneys and the New Zealand-based AJ Park.
Let’s bring up the daily chart over the last year or so:
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The share price recently broke out to higher levels and has now more than doubled in the last year. IPH is the largest Australian company in its field with a market cap of $1.39 billion.
QANTM Intellectual Property Ltd [ASX:QIP] is valued at $183.6 million while Xenith IP Group Ltd [ASX:XIP] has a market cap of $170.3 million. The two companies were looking to merge in an all-scrip deal. Xenith shareholders were originally scheduled to vote on a scheme of arrangement today, but the meeting was postponed.
IPH is looking to quash the deal. In February, it picked up a 19.9% stake in Xenith. The move is designed to block the proposal for a merger.
Last month, IPH went hostile with a full bid to acquire Xenith. It’s offering cash and scrip in a 65/35 split. The upward recent move in IPH’s chart shows that investors back the idea.
The Xenith board is backing the merger with QANTM. It said the unsolicited offer from IPH is not a superior proposal, so it’s game on.
Both deals attracted the attention of competition watchdog, the ACCC. The agency said it will not oppose the proposed merger or the acquisition. It believes there’s sufficient competition from independent firms and the party left out of any completed deal.
This is a field with strong cash flows that attract investors.
We’ll continue to watch and see how it plays out.
Editor, Money Morning Trader
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