This is a firm which in December reported the following:
Nick Carr, managing partner, comments: “We’re pleased with our results, operating in what continues to be a challenging economic environment.
“As forecast, there has been no real growth in the UK legal market over the last six months. Considering the prevailing market conditions, we set and met a prudent but still challenging budget, forecasting fee generation in line with the market and seeking to align expenditure to anticipated income.
“Our half year results ensure we remain on target, and new client wins mean that trading predictions for the next six months are strong. We expect to meet our financial targets by year end.” (for the rest of the press release see here)
It even recruited in a new associate to its pensions team in the Leeds office on the 17th January (as well as another 3 new hires in December) This is a firm whose average profit per equity partner for 2010/2011, as reported by The Lawyer, was £323k.
Then in stark contrast to this tale of stoical performance, it declares its intention to go into administration.
So, what went wrong? How could it have gone wrong so quickly? Or is this a case of long term fiscal mismanagement?
As you read through The Lawyer’s timeline to administration a couple of facts jump out at you:
- The firm had expanded rapidly between 2002 and 2004 with 5 mergers. After the mergers, Cobbetts emerged as a top 50 firm. That’s also four lots of rents on buildings in London, Leeds, Birmingham and Manchester.
- Debt had increased by £4.3m between 2007-2008 which was the equivalent of about 10% of its turnover
- In December, just a month before filing its intention to go into administration, it hired 4 new lawyers.
- The firm had a large unpaid debt of £255k from a client which it was suing for ‘unpaid’ fees
- The planned merger with DWF, in early 2012 did not go ahead.
The firm had large debts:
If Roll on Friday is to be believed, they had a very tough time in 2007/2008, with the firm’s core business in property and corporate getting hammered in the credit crunch and resulting recession:
“And with the core of the firm’s business being its property and corporate departments, Cobbetts was always going to find the credit crunch a struggle. Back in 2008 the firm was forced to undergo two redundancy rounds within two months. Then some pretty depressing results were unveiled for the 2008/2009 period, with revenue falling by 18% and profits plunging by a deeply worrying 53%. 1+PQE lawyers at the firm had their salaries frozen in 2009, whilst NQs saw their take-home slashed from £37k to £30k and trainee rates were cut by 10% for nine months. And things were still tough in 2010, average partner profits were just £96k – hardly breadline but pretty measly compared to the firm’s peers.” (see rest of Cobbetts’ profile on Roll on Friday)
In fact, I have seen it widely reported that the firm had 3 rounds of redundancies in the 2008-2009 years. This is largely in line with many law firms in that period. However, why no redundancies reported since these large and deep cuts?
We know that the firm was still carrying a large amount of debt as Legal Week reported that Cobbetts had agreed to refinance £10m in existing loan and overdraft facilities with Lloyds, after switching from previous lender Royal Bank of Scotland at the end of the 2010-11 financial year.
It looks increasingly likely that the Lloyds decided to pull the plug on lending to Cobbetts because on the 25th January (according to Legal Week)
“Documents filed on 25 January state that the firm created a debenture “securing all monies due or to become due from the Limited Liability Partnership to Lloyds TSB” on 16 January. The debenture also entitles Lloyds to “the power to appoint an administrator and/or a receiver”.”
Are the current trading conditions to blame?
It’s easy to blame the marketplace for Cobbetts’ woes. Yes, without the credit crunch and corresponding hit to the firm’s core businesses of corporate and property, this firm wouldn’t be in this current difficult position. However, I think that the true blame has to lie with the firm’s management failure to adapt to the economic realities and poor financial management. This is a firm with 242 lawyers and over 551 staff. If you do the maths that is a ratio of almost 2.5 support staff to 1 fee earner. Anyone else find that to be rather support staff heavy? Particularly when so much of their core business was commoditised?
You don’t just suddenly find yourself in this size of financial hole. Why wasn’t there a recruitment freeze in 2012? Why wasn’t the wage bill reduced still further with more rounds of redundancies in the last 24 months? Rumour has it (from The Lawyer magazine) that one of the reasons for the DWF merger floundering was both firms had recently taken on expensive office leases. Could the firm really afford these expensive leases? Why weren’t the unprofitable parts of the business killed off earlier? How did the firm let it get itself in the position where it had an unpaid client debt of £255k?
We wouldn’t know yet what went wrong at Cobbetts for a while. There are some large unanswered questions – namely the upbeat trading statement in December 2012 and the strange decision to hire 4 lawyers in December and January. My view is this firm failed to adapt both its strategy but more crucially it’s business model quick enough in response to a changed marketplace. This combined with some possible poor financial decisions, led to the firm’s downfall.
Update 1st February 2013
It appears that DWF is now going to buy Cobbetts – see law society gazette article. In this article, the Cobbetts apparent problems came about through poor trading conditions in November and December. This suggests to me that firm was working at the limit of it’s credit facilities and needed to have taken some steps earlier to reduce it’s overheads.
Interestingly with DWF now buying the firm, this probably means it will now be in the position to buy the book of business and cherry pick which parts of the firm (clients, partners and teams) it keeps and which it ditches. Expect large scale redundancies to hit Cobbetts staff.
Update 10th February 2013
It has been announced that DWF is buying all of Cobbetts apart from it’s Debt Recovery and the Finance Litigation Team. The Finance Litigation team are heading to the Leeds based firm, Walker Morris. All of the Cobbetts remaining practice areas will move to the DWF offices. With Cobbetts going into a pre-pack administration, DWF have (as predicted) been able to buy the book of business, cherry pick the teams and staff they wanted and ditch the expensive leases on the Cobbetts offices. That’s a good bit of business for DWF!
Update 24th February 2013
According to a Business Desk article, it appears that the landlords of the Cobbett’s offices are facing a £24million hit, due to DWF only agreeing to buy Cobbetts if they were declared insolvent, due to Cobbetts large borrowings and high lease costs. The firm had debts of £41 million, which over 60% was office rents. According to the Business Desk article, Cobbetts nearly breached it’s banking facilities in October and managed to agree some extra funding. At this point in time a contingency plan was drawn up by KPMG if the firm’s fortunes did not improve.