March 5, 2019

More twists and turns for Australia’s listed IP firms

The IP profession is awash with intrigue and uncertainty again as corporate owners of most of the largest IP firms in Australasia focus on mergers, trying to block mergers or buying shares in their competitors.

When the legislation changed in 2013 allowing patent attorney firms to incorporate, Australian patent attorney firm Spruson & Ferguson took it one step further and in November 2014 listed on the Australian Stock Exchange (the ‘ASX’) as Intellectual Property Holdings (IPH Limited). IPH went on an acquisition binge and bought up a bunch of smaller former Australian competitors, including Fisher Adams Kelly, Pizzeys, Callinans and Cullens. In October 2017, IPH swallowed up struggling New Zealand firm AJ Park, which had only the year before, celebrated 125 years of independence.

Not to be outdone, Shelston IP listed in 2015 as Xenith IP Group Limited, and proceeded to acquire Watermark, Griffith Hack, and Glasshouse Advisory.

Then in 2016, two large Australian IP firms, Davies Collison Cave and Freehills Patent Attorneys, merged under listed holding company Qantm IP Limited.

The upshot of all this is that now 8 of the 10 biggest IP firms in Australasia are owned by three ASX listed corporations and they employ roughly 65% of the profession.

Our analysis at the time concluded that the IP industry in Australasia was not big enough to sustain three large IP companies whose pitch to investors focused on the growth potential of the industry. We were also deeply concerned that public ownership would not be beneficial to the acquired firms, their clients or staff.

We predicted that the shift to a listed company model would lead to increased conflicts of interest for clients, a reduced focus on client service, and that senior attorneys and rising stars would become disenfranchised with there no longer being any prospects for equity partnership.

And so it has transpired

The new Code of Conduct for the Australasian IP profession now clarifies that where two IP firms are owned by the same listed company, a conflict of interest will arise if one firm acts against the client of a commonly owned firm. Given the merger of so many firms, this is a real issue.

There has also been considerable lateral movement in the market with attorneys jumping ship to private firms that can offer the professional and financial rewards of having ownership of their firm. The promise of career opportunities and a potential shareholding in a listed company, that may or may not deliver dividends in the long term, has not been enough to retain top talent, with some listed firms suffering 20% or more of their fee-earning professionals leaving.

The firms themselves are struggling to meet shareholder expectations. Indeed, in the introduction to its 2018 Annual Report the Chair of Xenith said ‘we are not satisfied with the current financial performance of the Group and we know that investors share our dissatisfaction.’[1]

Most headlines and media commentary have had a financial theme – valuations, share price fluctuations, half and full year annual results. Where did management focus on client service go? Instead we are hearing accounts of service levels dropping off in terms of quality and timeliness, and that fees are going up because professional staff in listed firms are under immense pressure to meet billing quotas.

It is sad to see this focus on satisfying public shareholder expectations and maximising profit come at the expense of client focus and service – especially in a profession that has traditionally been built on these very things.

It is not hard to be skeptical about the new industry model

How could share value be grown and profits increased in a market that is relatively small, stagnant and over which IP firms lack influence? It is bad enough that for an IP firm holding company to succeed, it must transform a disparate group of culturally-diverse private partnerships into a corporate, streamlined structure, while learning to do things cooperatively and focusing on maximising profit. But when there are three large corporates all competing for the same thing, it just becomes untenable. It is like having three sharks in a rockpool that only has enough food to sustain one or maybe two – there will be blood.

In the same way as we have become accustomed to each jaw-dropping tweet from Donald Trump, it came as no surprise to learn of the latest manoeuverings of the three IP corporates.

In November 2018 we heard that the two smaller IP holding companies (Xenith and Qantm) were merging to create a single entity that could better compete against IPH. Given the disappointing financial performances of these companies, their Boards had to get creative. But what are the chances of achieving cultural and strategic alignment across an even wider aggregation of former competitors? And what of the huge increase of client conflicts as two large IP companies become one?

Almost immediately thereafter we learned that IPH had made several takeover offers to Qantm – each of which were spurned.  Perhaps IPH feared the competition of a Qantm-Xenith merger and was trying to be disruptive. Or perhaps IPH wanted to create a monster in the rockpool that would certainly crush its competition – we can only guess. But for now, such a merger appears off the table.

However, more surprises were to come. Rejected by Qantm, IPH turned its attentions to Xenith, announcing on 13 February 2019 that it had acquired a 19.9% stake in the Xenith group – making it Xenith’s largest shareholder.  With this, it professed its opposition to the merger with Qantm. If this was a soap opera we would be applauding the unexpected and incestuous twists in the plot.

However, while we marvel at the cut and thrust of the corporate world – we can easily forget about the IP firms, their staff and their clients who command little attention in this battle. Who is worrying about them and the basics of client service while their masters are locked in a struggle for survival and dominance?

A new ethical issue

And finally, what about the new ethical issues raised by IPH taking such a large stake in Xenith? If an IPH owned IP firm engages in litigation against a client of a Xenith owned IP firm, doesn’t IPH stand to gain financially from both sides of the dispute?  Isn’t that a conflict?

It is indeed sad to see such a large proportion of the IP profession dragged into these kinds of ethical issues and corporate power plays; but it is a poignant illustration of the conflict between corporate imperatives and professional responsibility.

Who knows where it will all end. More takeover activity or the collapse of one or more of the IP companies due to an economic recession or some other reason, could create another seismic change in the IP landscape

Meanwhile, those businesses who have been following what is happening and understand the issues are no doubt pleased that there are at least some IP firms that have remained independent and professionally focused – and by all accounts they are thriving.

[1] Xenith IP Group 2018 Annual Report

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