Law firm Gordon Dadds (GOR:AIM) announced on Monday that it has bought the UK interests of Ince & Co while results for the first half of the year show costs rising faster than revenues.
Gordon Dadds says it has acquired Ince’s UK legal practice for £27.3m in cash payable over four years plus options on up to 3m new shares.
However the deal doesn’t include Ince’s international operations which were meant to part of the deal when it was unveiled in October.
LESS ATTRACTIVE DEAL
The assets which Ince UK brings with it generated fees of £30m in the year to the end of April 2018 compared with fees of £31m for Gordon Dadds in the year to March 2018.
When the deal was originally announced, Dadds was counting on Ince bringing in £52.5m of turnover compared with its own estimated ‘annual run rate’ of £42m.
It now seems that Ince’s European, Middle Eastern and Asian operations aren’t part of the deal. Only the Beijing and Shanghai offices are included as they are branches of the London operation.
Gordon Dadds says it will ‘seek to develop deeper arrangements’ with the offices it hasn’t been able to buy but this clearly isn’t the deal it wanted and it brings in less revenues than expected.
As a result the price is lower than the £34m initially announced.
COSTS UP, MARGINS DOWN
Looking at the results, revenues for the first half were up 56% to £20.1m but staff costs were up by 67% to £8.1m and ‘other operating expenses’ were up by an eye-watering 95% to £7m.
Therefore operating profits are up 23%, or less than half the increase in sales, to just £4.3m. That makes the operating margin 21% compared with 27% a year ago.
The company admits that it hasn't met its cost target and blames the Ince takeover for distracting it from cutting overheads in its existing business.
There is no clear explanation for the sudden increase in ‘other operating expenses’ but the notes to the results say that ‘exceptional costs’ in the period covered were ‘incurred in pursuing the acquisition of Ince & Co’.
This suggests that buying Ince & Co could have directly and indirectly increased costs by as much as £5m.
Shares in Gordon Dadds have been suspended since the deal was announced back in October but have been re-quoted today and are trading up 1.5% or 2.5p at 184p.
