Now that McGladrey & Pullen has completed its acquisition of RSM McGladrey from H&R Block, the reunified firm no longer needs to say that it operates in an alternative practice structure.
The firm announced in August that its board of directors had reached an agreement with Block to purchase back RSM McGladrey for $610 million (see Block Sells RSM to McGladrey & Pullen). The acquisition was completed Wednesday. The combined firm has a little over 600 partners and a total of approximately 7,000 employees, with annual revenues of about $1.3 billion.
Managing partner and CEO Joe Adams talked with Accounting Today on Friday about his plans for the firm now that it is back together again for the first time since 1999, when Block acquired the non-attest side of M&P. Adams has been leading the firm since May, but has been with McGladrey since 1979.
So RSM and McGladrey & Pullen are reunited now, right?
Yes, that’s correct. McGladrey & Pullen’s attest practice repurchased the consulting and tax practice from H&R Block. That transaction was closed and consummated on Wednesday, November 30. So we’re one firm and working together now in an integrated way to better serve clients.
What’s the transition going to be like now that you’ve been reunited? How do things change?
We’ll have one team. Strategically it will be a lot easier to get aligned. We had kind of drifted to where we had started to do more strategy by tax, by consulting, and by audit, and now we will take a holistic client view and really work better together so that it’s really about what’s best for the client and let’s not really worry about whether it’s a tax, a consulting or an audit opportunity. Let’s just look at things as a client opportunity and just make sure we put the best people on the client and that we provide the client with the best service. It will reflect right back to the people side. We can now take a better look at our training programs and the development of our people, and really be able to more effectively provide training. I think it allows us to be more efficient. Instead of having multiple divisions, we have one group who is working with all three of our major service lines.
What’s going to happen in terms of offices and people moving from one department to another? Are people going to be relocating or will you be consolidating offices?
We really operated in the same locations even though we were separate businesses. We don’t really see any changes there. There may be people moving around more and people transferring, but that’s more from a business point of view, not an efficiency point of view. It’s really more about where do we need the resources. Let’s say we might need a financial services person in New York or whatever. Hopefully, it will be easier to move people from one location to another to make sure we’re serving clients, but as far as closing of offices and things like that, we really have no plans. In fact, our plans are to grow the business and to add locations.
Is RSM McGladrey going to just cease to exist at this point and it’s going to be just McGladrey & Pullen? Will there still be an RSM network that you’re part of?
Yes, we will own the network so that will be part of McGladrey. RSM legally will continue at least till the end of the year because it’s much easier from an employee payroll point of view, but then it will merge into McGladrey & Pullen as of January 1, and then the network and the alliance and RSM McGladrey will merge into McGladrey & Pullen. We’ve already started to brand ourselves as McGladrey, so it’s a lot easier to do.
Didn’t you also have an international network with RSM?
Yes, we’re still part of the RSM Network and we’re working through that transition as far as the name is concerned.
What’s it going to be like operating more as an accounting firm now rather than as part of H&R Block? How do things change there?
We’re completely owned by the partners now. The partners have put capital into the transaction as well as bank financing. So our hope is that the partners step up more now to really do the things that we need to do to be successful.
So you’re completely separate from Block now? There’s no longer any relationship?
Right, totally partner owned, so there’s really no legal connection at this point. One of the restrictions we had, being partly owned by a public company, is it created independence issues for us. We couldn’t do audits for certain business lines if they owned H&R Block stock. So this really allows us to enhance our financial services industry line, because we no longer have that restriction on the one-share rule, as it’s called. The independence rules around stock ownership precluded us from going after some businesses that owned H&R Block stock, like mutual funds and hedge funds and benefit plans. If they owned Block stock, we couldn’t do the audits, and now that restriction is gone. It opens up the door for us to go after clients that we were precluded from serving before.
Does it also open the door for you to expand your tax practice?
Well, tax is not really governed by independence [rules], so the tax opportunities are the same under the old and the new.
You guys have had some problems with Block over the years and they’ve had their own issues internally. What’s it going to be like to be free of them?
Obviously we had an issue with them a few years ago [Block and RSM McGladrey sued McGladrey & Pullen in 2009 after M&P terminated their administrative services agreement, but they eventually renegotiated the deal]. But we got to where we are now because of the investments that Block has made on our behalf. I’m still a shareholder of Block and will continue to be a shareholder, so I wish them well. From their point of view, this was key to their strategy to focus on their core business, and I think they’re better positioned to be successful in the future. So like I said, I’m still a shareholder and I expect them to do well. I think it was certainly a situation where we both strategically felt this was the time. Even though they’ve done a lot of good things for us, we felt like the time was [right] for both of us to separate, and it worked out well.
They will have some financial benefits as well from the decoupling?
They certainly got paid some cash, so I’m sure they’ll use that to invest in their business.
What was the purchase price?
I’m trying to think of what they disclosed in their 8K. Depending on how you account for it, there are different ways to look at it, but I think they disclosed it was somewhere around $600 million as the total purchase [price], somewhere in that range.
What are your plans now for McGladrey? Where do you see yourselves growing, in particular service lines or internationally?
Yes, I think the big three for us probably are international, private equity firms and their portfolios, and moving up in the SEC world. Then specialty consulting, especially in the transactions area and technology and risk advisory. We just opened an India offshoring office that helps us be more competitive in the risk advisory area, but consulting is where we expect our greatest growth. We’re up over 20 percent in a number of service lines this year in consulting.
There were some interesting proposals that came out of Europe the other day about consulting and separating that from audit. Do you think that will have much of an impact on you in Europe?
Yes, the European Union, it will definitely have an impact for us. We expect it would probably help us because if you’re a smaller player and you get more opportunities, you should be getting more wins. Who knows where that’s going to go, but clearly the changes that they’re contemplating in Europe would only help McGladrey get more opportunities because, number one, we don’t audit a lot of public companies, so we would be able to provide consulting for those companies. And if more public companies had to change auditors because of rotation, we would have more opportunities to possibly win new audits, but we’ll see where that goes.
In the United States the PCAOB is considering requiring mandatory auditor rotation. Where do you come down on that? Do you think that might give you more opportunities in the U.S.?
I think it would, but I don’t necessarily think that that’s a great idea. It’s hard to say. It really is. If more firms had to change, there would be a lot more activity, and I would certainly like to think that we would win more of those opportunities, but I’m not sure mandatory rotation is a great idea. I don’t think it would make the audits better, but that’s my personal opinion.
There’s also been a lot of controversy lately over private company accounting standards and who should be in control of those. Do you have any thoughts on that?
When we looked at that, we actually had a position paper that would support a separate board, but we certainly are not saying that we’re in support of the AICPA splitting it out. We would like to see it stay under the FAF. There are comments being provided now on that, and we’re certainly willing to accept wherever that goes, but overall I would say from a personal point of view that private company standards should certainly be a little different from the public standards. However we get there, we’ll support either approach. We just want to make sure that we treat private companies a little differently because certain standards are geared toward large companies that don’t benefit the small client. To me it’s about helping the client. It’s all about making sure that the private company is served well and that we do the things that make sense. I’m not going to get into the politics of how that should be done. I just want to make sure that happens.
I saw you just renewed your deal with the PGA to sponsor your golf tournament for another three years. Are you planning to expand your sports sponsorships?
No, we’re pretty much focused on the golf platform, and the reason we focus on the golf platform is we think our values align with golf. It’s a game of integrity, and we’ve got a business of integrity. It’s a game of trusting your advisor, the caddy-golfer relationship, and that’s certainly how we view ourselves and our clients, is trying to build trust and work with our clients. And then excellence: We want to be the best we can be, just like the golfers, and then from a business point of view, when you think about an area that many C-level executives—CEOs, CFOs, CIOs, people that really would buy our services and that we do business with—there’s a greater proportion of them who do follow golf and play golf. From a target point of view, we try to target who our clients might be and who our clients are, and golf is a way to reach them. We’re not planning to expand that to other sports or anything. We’re comfortable that that’s the place, and with the limited amount of money that you have for marketing budgets, we really like to put it in golf because we think it’s a better targeted approach to reach our intended audience.
So overall how are you feeling about the reunification of McGladrey?
The partners are very excited to be owners again, and I think our employees are looking forward to it. It’s always good when the attitude is positive. I think overall everybody is pretty excited about the opportunity to work more closely together as one firm, and we’re anticipating that it’s going to benefit our clients and we’ll be able to be more successful in the future.
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