27 November 2019

Another Venerable Brand to Vanish, as IPH Folds Watermark into Griffith Hack

Merger AheadOn 20 November 2019 IPH Limited (ASX:IPH) announced its intention to ‘integrate’ Watermark into Griffith Hack, to create one firm that will operate under the Griffith Hack brand from April 2020.  This is the second time that IPH has merged long-established brands out of existence, following its absorption of Fisher Adams Kelly Callinans and Cullens into Spruson & Ferguson last year.  The latest move will, sadly, spell the end of the oldest continuously-operating specialist IP firm in Australia – Watermark can directly trace its history over 160 years, back to 1859 when Edward Waters co-founded the firm of Hart and Waters in Melbourne, later to become Edward Waters and Sons, and eventually adopting the Watermark branding.  (Although I would be remiss not to mention that Watermark’s IPH stablemate, Shelston IP, also has a claim to this lineage, being descended from Edward Waters’ Sydney branch office, which was established in 1882.)  As many readers will be aware, I worked at Watermark for nearly 15 years, and I will be very sorry to see the brand disappear from the Australian market, as will many others who have passed through the firm over the years, along with those who work there still, clients past and present, and members of the wider profession for whom Watermark has always been part of the firmament.

Since the acquisition of Xenith IP Group Limited (formerly ASX:XIP) back in August, IPH’s portfolio has included Spruson & Ferguson, Pizzeys, A J Park, Shelston IP, Griffith Hack, and Watermark.  It was to be expected that IPH would review this portfolio, with an eye to improving the overall performance and productivity of the group.  Clearly, the conclusion from this review is that Watermark does not stack up as an independent operation.  Certainly, it covers much of the same territory as Griffith Hack – both have offices in Melbourne, Sydney, and Perth (with Griffith Hack also having a presence in Brisbane); both operate IP law firms alongside their patent and trade marks attorney businesses; and both have a similar mix of domestic and foreign-based clients.  But Griffith Hack is significantly larger than Watermark – for example, it employs about two-and-a-half times as many patent and trade mark attorneys, and files a correspondingly larger number of patent applications each year.  From a business perspective, operating two firms with comparable profiles, but such different scales, does not make a lot of sense.

Sad as it is, Watermark’s passing serves as a timely reminder that nothing lasts forever, and change is inevitable and unavoidable.  And while IPH may regard Watermark – no doubt rightly, in the context of its portfolio of firms – as a ‘sub-scale’ business, it remains, at the very end, a profitable business, with a strong reputation commensurate with its long history of service to clients, which is something of which its people can continue to be proud.  There are certainly many less auspicious ways to bow out than by merging into what will become, in all likelihood, the second largest IP services firm in Australia after Spruson & Ferguson.  Indeed, I have little doubt that in the years to come we will witness the demise of other firms in more unpleasant circumstances.

A Tough Market for IP Service Providers

The harsh reality is that the Australian market for IP services is tough, and I do not see it getting any easier in the foreseeable future.  I have written here previously about Australia’s underperformance in translating solid foundations in R&D into successful innovation outcomes, and the corresponding low rates, and lack of growth, of patent filings.  I recently wrote an article for IAM Magazine (subscriber access only, I am afraid) expanding further on this theme, and arguing that the ongoing transformation of the IP profession in Australia has been strongly influenced by the challenges of the market.

There is no sign of any improvement.  Indeed, in the first quarter of the current financial year (i.e. July-September 2019) the total number of patent applications filed in Australia was down by 2.2% from the same period last year.  The situation was actually slightly worse than this for patent attorney firms – a slight rise in self-filed applications meant that the reduction in attorney filings was 3.0%.  Almost all of the firms making up the top 10 filers of 2018 have taken a hit: filings by Spruson & Ferguson were down by 7.0%; FB Rice down by 5.8%; FPA Patent Attorneys down by 9.0%; Phillips Ormonde Fitzpatrick down by 10.6%; and Madderns down by 39.8%.  Watermark has fared comparatively well by these standards, down by ‘only’ 5.4%, and Griffith Hack a little better, down by 3.7%.  Of the top 10, only Davies Collison Cave (down 1.3%), Pizzeys (level with last year) and Shelston IP (up 0.2%) performed better than the market overall.

A trend of clients moving away from larger firms in favour of small and micro-firms appears to be continuing, i.e. despite consolidation of the market at the top end, there is also fragmentation of work across the smallest firms.  Among firms with four or more patent attorneys, the year-on-year drop in filings in the first quarter was 4.4%, while in the further subset of firms with 10 or more patent attorneys, filings were down 7.7%.  Interestingly, however, within this group of larger firms, those in listed groups performed better than the privately-held firms, with filings by listed group firms down by 4.3%.

Pursuing Growth in a Low-Growth Market

Over a period of nearly 40 years, between 1980 and 2018, the total number of patent applications (standard, innovation/petty, and provisional combined) filed annually in Australia has grown by a factor of three, from just over 12,000 to around 37,000.  The chart below summarises Watermark’s patent filings over this period, with the blue trace and left axis showing the actual number of filings each year, and the orange trace and right axis showing the corresponding share of total filings.
Watermark Filings, 1980-2018
As the chart shows, Watermark had some good years, especially around the late 1990’s and early 2000’s (although I note that this peak is largely due to one particular client that rode the bubble which led to the ‘telecoms crash’ of 2001).  Overall, however, Watermark has achieved virtually no net growth in annual patent filings, resulting in a three-fold reduction of market share.

Of course, in itself there is nothing necessarily wrong with this.  As the market for patent attorney services has grown, so has the number of patent attorneys, and the amount of competition in the market.  A business is under no obligation to grow, and remaining steadily profitable at a comfortable size is a perfectly legitimate objective.  However, most substantial businesses do want to grow, and create new and better opportunities for their owners, operators, and staff.  That was certainly the case at Watermark.  However, in recent years – and particularly since the global financial crisis of 2007-8 – there has been little growth in the Australian market for patent attorney services, creating significant challenges for providers of these services, such as Watermark, that have been trying to find ways to grow their businesses.

These market conditions have strongly influenced the changes we have seen in the Australian IP profession, including public listings, and the decisions of a number of firms to be acquired by listed entities to gain the benefits of access to greater sources of capital, and the potential efficiencies from being part of a larger group.

So far, however, there is little sign that any of this is resulting in any actual growth in market share for firms that have gone down the path of listing or acquisition.  The chart below shows the share of Australian patent filings since 1980 for the firms that were in the top five filers in 2018. 
Top 5 Firms Filing Share
The three listed group firms (Spruson & Ferguson, Davies Collison Cave, and Griffith Hack), which all held fairly steady shares between 1990 and 2010, have now been losing share for a number of years.  This trend does not appear to have been arrested in the most recent years, since public listing.  As for the two privately-held firms, Phillips Ormonde Fitzpatrick has experienced a gradual decline in share of filings over the years (although an increase in actual numbers) as the market and competition has grown around them, while FB Rice alone has achieved a substantial growth in its share of Australian patent filings.

Conclusion – An Inevitable Outcome?

From a business perspective, the integration of Watermark into Griffith Hack makes clear sense, and the move by IPH is therefore not hugely surprising.  By itself, Watermark could probably maintain its business at the current scale, but would continue to struggle, as it has for many years, to achieve any growth.  However, the combined annual patent filings of Griffith Hack and Watermark in 2018 amounted to 11.1% of all filings, comfortably surpassing Davies Collison Cave (9.1%), and second only to Spruson & Ferguson (15.2%). 

IPH, along with the staff of Watermark and Griffith Hack, will be hoping that this increase in scale will enable the combined business to improve its efficiency and profitability, and perhaps even manage to achieve some growth in a market where this is becoming increasingly difficult – especially, it seems, for mid-to-large sized firms.  As a Watermark alumnus, I can only wish them well in their future endeavours.

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