American Express' foray into acquiring and operating accounting firms has ended.
Earlier this month, the financial services conglomerate sold its Tax and Business Services division to tax-prep giant H&R Block for $220 million. Block will subsequently fold the unit into its RSM McGladrey Business Services arm, creating a mammoth accounting firm with nearly 7,000 employees and revenues of more than $1 billion.
"The demands placed on the Big Four accounting firms to serve their largest Fortune 500 clients have left too many midsized businesses without the dedicated resources they need," said Block chairman and chief executive Mark A. Ernst in a statement. "This transaction creates a firm that combines the resources and reputation of a national firm with a dedication to middle-market client success."
American Express TBS ranked No. 9 on Accounting Today's 2005 list of Top 100 Firms, with revenues of $385 million. With estimated aggregate revenues of $1.05 billion, the combined company would still remain well behind No. 4 firm KPMG (with revenues of $4.12 billion), and comfortably in front of No. 6 firm Grant Thornton, which reported revenues of $634 million.
"It's an outstanding opportunity for us," said AmEx TBS chairman Gerry Golub, whose New York-based firm, Goldstein Golub Kessler LLP, was acquired by AmEx TBS in July 1998. "For AmEx, the investment opportunities in professional services firms were not as great as their other lines of business. But they were a great partner, and we learned a lot from them. For us, we have a history in the New York area and across the country; it's a great fit with RSM."
American Express was one of the pioneers of what became known as the consolidator or "roll-up" trend in the late 1990s, with a buying spree that included many high-profile CPA firms in New York, Chicago and Cleveland.
Other consolidators followed shortly thereafter, such as Cleveland-based CBiz and Centerprise of Chicago, now rebranded as UHY Advisors.
However, American Express and the others had difficulty making the roll-up model profitable, and soon both revenue growth and firm acquisitions had ceased. The integration of disparate firm cultures under one umbrella had become a giant speed bump, and many of the acquisitions were predicated on a exit strategy for retiring partners, rather than future growth. As a result, many of the clients left as well.
"AmEx gets rid of something they really didn't have a passion for, and RSM is now at a size where they can be a viable alternative to the Big Four," said industry consultant Allan Koltin, chief executive of Chicago-based PDI Global. "RSM has not reaped the fallout from Sarbanes-Oxley as much as BDO Seidman or Grant Thornton. The play today is really about size, and RSM thought that if they could super-size, a lot of opportunity would come their way."
Koltin, however, added that there could be sticky integration issues, particularly in Chicago, where TBS and RSM competed fiercely.
Earlier this year, Block acquired 11 AmEx TBS offices in the Tampa, Fla., Phoenix and Atlanta markets in an effort to launch H&R Block Small Business Resources - a unit that would provide tax prep, payroll, bookkeeping and financial planning services to businesses with 25 or fewer employees.
The AmEx-Block transaction is expected to close by Sept. 30, subject to approval from the Department of Justice.
