Shearman & Sterling's IPO

Across the pond, we're about to see an actual experiment that heretofore could only have been a thought experiment:  Thanks to the "Clementi Commission," non-lawyer third parties will now be able to invest in law firms—most dramatically, law firms could even go public through IPO's.

Before we can become sullied by actual experience with this newly-opened door, then, it's a matter of some urgency to forecast what it might mean.

A not-insubstantial school of thought holds, predictably, that essentially nothing will change.  Proponents of this view have more than sheer tradition on their side; for example:

• law firms are not intrinsically capital-intensive;
• to the extent they do need capital, any decently-run firm generates enough cash from operations to fund typical requirements handily; and
• third-party owners of "the wrong sort" could conceivably be viewed as posing apparent conflicts of interest with specific clients (for example, what if Goldman Sachs bought a large chunk of Shearman & Sterling, which traditionally has been a "go-to" firm for Morgan Stanley?).

Also, law firms in general—even the Magic Circle firms and the AmLaw 25—still remain creatures of economic cycles, with little guaranteed recurring income and the ever-present risk of stars checking out along with their client rosters, so they do not meet the classic profile of an attractive buy & hold investment.

But once you look beyond the BigLaw marketplace, different business models could surely evolve, serving clienteles other than the Fortune 1000:

• The H&R Block model, serving individuals with elementary, simple problems through walk-in locations.
• The Bank of America/Wachovia/Washington Mutual model, offering a slightly longer menu of services and hoping to establish "one stop shopping" customer relationships for all one's financial (read: legal) needs.
• The Smith Barney/Merrill Lynch model, with highly personalized service for wealthy indviduals and small business, backed by national research and branding.

Not only do these strike me as more than plausible, each is far more capital-intensive than a conventional law firm—in other words, candidates for public listing.

Let's end by batting away a non-issue:  The claim that one can't put a market price on a law firm.  Of course one can, using the familiar tools of financial analysis including the recent growth trends in revenue and cash flow, the strength and composition of the balance sheet, the dispersion or concentration of the clientele and the practice areas, lawyer and staff turnover, etc.  

Only one thing can be said for sure at this point:  Now that the Clementi door is open, some firm is sure to walk through it.