by John M. Covaleski
Bloomington, Minn. - RSM McGladrey, the consolidation arm of H&R Block, is changing its deal-making strategy, fueling speculation that it may be abandoning accounting firm acquisitions altogether.
RSM managing director of mergers and integration, James Clarahan, said that RSM is shifting its focus from making new acquisitions, to beefing up what it has already acquired. He also said that the company will not buy businesses in new geographic markets.
Bloomington, Minn.-based RSM has been the industry’s most active buyer of firms since 2000 when Block created the company as the umbrella organization for the non-attest operations of several accounting firms that it acquired in the 1990s. The attest operations have been placed into one of its early acquisitions, McGladrey & Pullen. The combined units rank No. 7 on Accounting Today’s 2002 Top 100 Firms list.
"I am now focusing on integrating what we have acquired and activity in that area," said Clarahan. "The acquisitions we make will be ones that make sense in markets where we have an existing presence and where we want to build our market share and dominance."
However, several informed industry sources said that in light of weak market conditions and increasing government scrutiny of the profession, there is an aversion to accounting firms from investors, in general, and publicly traded companies, such as Block, in particular.
"It sounds to me like Mr. Buffett [investor Warren Buffett, one of Block’s major shareholders] has made his influence known to the Block board, and I can’t imagine he would like accounting firms," said an executive with a CPA firm that is also active in acquisitions.
Other profession authorities, who claim to be privy to dealings between Block and RSM, say that the parent company has ordered RSM to terminate its M&A operation. RSM’s primary executives in M&A have been Clarahan and Jim Jensen, in Schaumburg, Ill., and Terry Putney, in Kansas City, Mo.
"This is going to happen. I heard it from the Block board," said one of those authorities, speaking anonymously. "We just have to wait."
"Rumors are going to be rumors, but we are still looking at acquisitions and we have deals in the pipeline," Clarahan said. He also emphasized that RSM remains committed to a mission, first announced by its chief executive, Tom Rotherham, two years ago, to be the dominant provider of services to middle-market businesses in the nation’s 25 largest markets.
"It’s still our intention to be the top firm in all those markets and in the United States, but sometimes you have to make adjustments as they relate to market conditions," Clarahan said. "We are making some minor adjustments as we execute our strategy."
A spokesman at RSM parent H&R Block declined to comment when asked about RSM’s acquisition and integration strategies. However, a September 2001 statement from Block chief executive Mark Ernst indicated that Block felt that RSM’s integration was complete at that time. "With the integration of firms now complete, we can better focus on growing this new business," according to that Sept. 21, 2001, statement posted on Block’s Web site.
Meanwhile, industry consultants speculate that changes in the industry and a continued stalled economy may have changed Block’s opinion. "It’s possible that Block has lost confidence in accounting firms as a profit center," said Jay Nisberg, head of the Ridgefield, Conn., practice management firm that bears his name.
"The accounting business is just not as profitable as investors want nowadays," added Robert Martin, president of the Denver-based consulting firm that is named for him.
"The business of selling additional services to existing clients has not worked," said Allan S. Boress, a Florida-based consultant. "Block may be realizing that CPAs are not trained or motivated to carry strangers [new service providers] to their clients."
However, Block was having success a year ago. Ernst’s 2001 release noted that RSM’s revenues grew by 20 percent from 2000 to 2001.
Allan Koltin, president of Practice Development Institute, in Chicago, speculated that uncertainty about the industry’s future, in the wake of the recently enacted Sarbanes-Oxley Act, which restricts firm activity, has further dampened buyers’ appetites. "With all the uncertainty about the profession and the potential for Sarbanes-Oxley to be expanded, buyers may not be confident about the future of accounting firms," he said.
James Castellano, chairman of the American Institute of CPAs, has warned that restrictions on small and midsized CPA firms serving privately held companies is a possible "cascade" byproduct of the Sarbanes-Oxley Act, which places restrictions on the services that firms can provide to public audit clients.
Regardless of Sarbanes-Oxley, it has not been unusual for consolidators to take time out to digest their holdings. Centerprise Advisors, a massive rollup of five regional CPA firms that was completed in 2000, has not made any CPA firm acquisitions since then.
Earlier this year, Centerprise reported that it had taken an intentional hiatus from acquisitions in order to integrate its operations. That company also said that it planned to aggressively pursue deals this year, but none have been reported.
Deal-making may also be thwarted due to Centerprise chief executive Bob Basten’s illness (see Illness on page 1).
CBiz, one of the accounting industry’s busiest consolidators in the late 1990s when it was known as Century Business Services, has also been in a reorganization and practice integration mode for more than two years. However, that activity was driven by the fact that publicly traded CBiz’s stock value dropped dramatically shortly after it made its en masse acquisition of firms.
A temporary withdrawal from acquisitions in accounting would not be unusual because deal-making activity within the industry has been very small this year compared to previous years. RSM McGladrey has, until now, been one of the more active buyers this year, having purchased two accounting firms and two business service providers in the past year.
However, Cono Fusco, an M&A director with national accounting firm Grant Thornton, said that there are deals to be made in the accounting industry. Fusco - who is not the source of the comment about Warren Buffett - said that his firm has not been buying because it’s been busy integrating its large hiring of partners and employees from Andersen.
"We have grown by 23 percent from that. But as that is completed, I would expect to close one or two transactions by the end of the year," Fusco said.
Asked about RSM, he said, "I heard their consolidation activity ceased months ago and it has not moved forward. It’s now a question of whether it will ever move forward."
