Why Slater & Gordon Limited shares fell 20% today

Shares in embattled legal firm Slater & Gordon Limited (ASX: SGH) have been smashed down 20% by the market today after a savage sell-off following its interim results release this morning. Slater & Gordon competitor Shine Corporate Ltd (ASX: SHJ) has also made headlines recently as a result of its operations, but Slater & Gordon’s woes appear to be far larger:

(source: Google Finance)

(source: Google Finance)

Possibly the biggest attention-grabber – asides from a massive fall in profit – was the $814m goodwill impairment against the value of the company’s recently acquired Slater & Gordon Solutions (‘SGS’, formerly Quindell’s Professional Services Division, or PSD) business in the UK.

The $1.2bn acquisition was acquired with much fanfare less than 12 months ago, and investors likely feel that today’s write-downs reflect an enormous miscalculation on the part of management, with two thirds of that money now having gone up in smoke.

In management’s defence, proposed changes to the UK regulatory environment could not have been directly foreseen, and the SGS goodwill write-down also incorporates some of the potential impact of these regulatory changes. $477m of the $814m write-down was assessed as ‘recoverable’ as at 31 December 2015.

Adding to shareholders’ woes was the company’s operating performance, which resulted in a hefty cash outflow in the half. Slater & Gordon expects this issue to reverse itself in the next half, which is expected to be much stronger cash-flow wise than the first half of the year.

However, with so many changes and misses to management’s expectations recently, shareholders may be best served by taking these statements with a grain of salt.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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