Shareholders in law firm Slater & Gordon Limited (ASX: SGH) will undoubtedly be a little nervous over the recent selloff of the company's shares.
Down 33% over the past three months alone, Slater & Gordon's share price has been hammered in the wake of its acquisition of the Professional Services Division (PSD) of United Kingdom-based Quindell Plc.
The PSD acquisition was large – Slater & Gordon paid $1.2 billion to leapfrog from the third largest personal injury law firm in the UK to number one position – and ugly, because of Quindell's poor track record.
Despite Slater & Gordon claiming they'd reviewed 8,000 case files, only 41% of retail shareholders participated in the recent retail offer to raise capital for the PSD purchase. Personally, I've held reservations over the deal since it was announced.
Two errors in reporting
Following speculation last week that some of Quindell's past activities are at the centre of an investigation led by the UK's Financial Conduct Authority, Slater & Gordon shares were sold off.
Then, more speculation emerged about the processes of Slater & Gordon's auditor, Pitcher Partners. As an aside, Slater & Gordon used Ernst & Young (EY) during the PSD acquisition to assess its books and restate figures where necessary.
However, today Slater & Gordon released a market sensitive announcement to the ASX which read:
"Since Wednesday 24 June Slater and Gordon (SGH) (Company) has engaged proactively with the Australian Securities and Investments Commission (ASIC) following ASIC's routine review of Pitcher Partners' (PP) audit process of the Company. The Company asked ASIC to raise with it any queries it had as expeditiously as possible."
Slater & Gordon is working with EY to assess ASIC's queries. Meanwhile, Pitcher Partners and Slater & Gordon have commenced a detailed analysis of the company's financial information.
From their initial analysis, two errors have already been found.
The first was in previously reported UK cashflows. It relates to Slater & Gordon's acquisition of Russell Jones and Walker LLP between June 2012 and December 2013. Ultimately, the error stems from reportable receipts from customers but is offset by payments to suppliers and employees. The net cash flows over the period remain unchanged.
The second error was due to a problem in the calculation of the Value Added Tax, or VAT, between June 2014 and December 2014. Essentially, the VAT (which is similar to our GST) was included twice. However, once again, this was offset by the same amount being added to payments to suppliers and employees.
Now what
Whether ASIC will find anything wrong with the Pitcher Partners' review process for Slater & Gordon is anyone's guess. However, after previously being very bullish on the prospects of Australia's largest law firm, the PSD acquisition has me seriously questioning why I've still got money tied up in the company.
It may well turn out that the market's fears were overblown (it wouldn't be the first time!) but for now it's too early to know for sure whether the acquisition was a mistake. In my opinion, the recent share price falls are not a clear cut buying opportunity.
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