Editor's view: The RSM Tenon fall-out

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So that’s it then. The rollercoaster ride that was RSM Tenon has reached what in the end was a fairly predictable conclusion

Richard Cree considers the fall-out from the pre-pack deal

Having been the subject of a speculative bid from rival mid-tier firm Baker Tilly in late July, a Stock Exchange announcement yesterday made it clear that the latest experiment in non-partner ownership for an accountancy firm had come to a sticky end. The firm was put into pre-pack administration and the operational elements immediately snapped up, by Baker Tilly. If RSM Tenon was expecting this outcome no one told its PR team, judging by the RSM Tenon website, where the lead press release in its media centre is a comment on the national insolvency statistics.

In truth there haven't been too many winners throughout the saga of RSM Tenon

Baker Tilly appears to have played a blinder with the biggest questions about the merger answered by the prepack deal, which means it doesn’t have to shoulder the listed company’s debts. The losers from the deal would appear to be the shareholders (although the smarter ones should already have been expecting to lose most, if not all, of their investment for some time) and Lloyds Bank.

 Few people will feel much sympathy for the bank, which due to its ongoing involvement in the financing of the deal may not have to write-off all of the estimated £80m of debt.

In truth there haven’t been too many winners throughout the saga of RSM Tenon, which has really reached a low point with the discovery of a black hole in its own finances (never a good thing, but catastrophic for an accountancy firm seeking to break with tradition). So what lessons does the whole saga offer?

1) “Turnover is vanity, profit is sanity”. Thanks to its regular use on TV reality business shows such as Dragons’ Den, more people are familiar with the idea that growth at all costs can often come at a terrible price. The undoing of RSM Tenon can at least in part be traced back to aggressive expansion strategy that rested on growth by acquisition. Most of these acquisitions happened at the top of the market.

2) The recovery will see insolvencies climb. One feature of this recession has been staggeringly low interest rates. These have allowed the phenomenon of “zombie companies” to develop, and in some ways RSM Tenon was a zombie accountancy firm, able to limp along servicing its debts but no longer able to finance growth through acquisitions. In previous recessions as the economy recovers, interest rates pick up (as a sign of economic vitality and activity) and more businesses struggle. Some clearing out of the deadwood may not be bad for the economy, although the situation is further complicated by the Bank of England’s decision to tie unemployment in to interest rates.

The partnership model works, especially for accountancy firms

3) The partnership model works, especially for accountancy firms. For all the critiques and brickbats thrown at it, it would appear to work better than any of the alternative structures, including setting up as a publicly listed company. The listing was in part meant to bring RSM Tenon access to financial markets to allow it to continue its expansion drive. But those markets have been sluggish and resistant to all but the safest lending and capital has been expensive to obtain.

4) We can expect further consolidation in the professional services market. Game-changing organic growth is difficult to achieve in any market and apparently even more so in accountancy. With the Big Four owning such a large slice of the market, there may be plenty of business out there for the rest of the field, but for a firm to jump up the top 10 requires consolidation of the sort offered by this deal for Baker Tilly.

5) There is a demand for greater competition. It’s been the buzzword since 2008, when a perceived failure by auditors to qualify the accounts of financial institutions on the brink of collapse was put down to a lack of competition having led to too much coziness and a loss of quality. To date there has been little hard evidence to prove that artificially generating competition in the market (though mandatory rotation or tendering of audits) will lead to any significant improvement in service quality. However, one aspect of the Baker Tilly takeover of Tenon is that it will create another significant player at the top end of the market able to handle more complex work. Life may be about to get even more competitive, with possible entrants from the far east and especially large Chinese firms (as in other industry sectors) looking to skill-up their employees with an eye to global expansion.

In the short term little will change in the UK profession as a result of this deal, other than for the employees and clients of the two firms. As with most pre-pack administration it is encouraging (especially for those employees) to see people keep their jobs. The longer-term ramifications for the profession, whether that is in confidence in the partnership model, or the degree of competition at the top end of the market, will take much longer to work through.

 


Richard CreeRichard Cree is editor of economia


 

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RSM Tenon updates on Baker Tilly talks

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RSM Tenon reduces losses as it issues covenant warning

 

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  • Comment by Fiona HM

    Richard, I have to agree with Keith that this sorry outcome derives primarily from the strategy adopted and not the business structure. Baker Tilly have played as you say a "blinder" but the hardest challenge will be to successfully to integrate the two firms.

  • Comment by Cashis Reality

    No CEO of RSM Tenon added shareholder value as measured by their impact on share price. Maybe that is why one of them, still today, measures their "success" at the helm by reference to turnover growth? See 1 above. Shareholders are rightfully angry but would a partnership structure have done any better? There have been high profile legal partnership collapses and the brutal reality is that accounting partnership failures have been masked by rescues masquerading as mergers. Look more towards grandiosity, greed, grubby management practices a sprinkling of myopia and occasionally some bad luck rather than business structure as the real villains of the piece.

  • Comment by Keith Graham

    Good article , but I dn't see that one can suggest that this failure supports the argument in favour of partnership structures. Surely it's a case of how a business is managed , the nature of its strategy etc. In other words , the failure was caused by over-aggressive expansion , as you say , 'black holes' and the reputational effect of them , and overall a strategy that didn't work. What's structure got to do with it

  • Comment by D James

    Only a few years ago I read an interview with RSM Tenon's boss in a professional journal espousing the virtues of RSM Tenon's listed status and endless growth. I couldn't see at the time how this would add value to anyone (except, presumably, the high-ups and their advisors on their takeovers), and of course it has come unstuck. Another lesson from this saga may be that greed and vanity are not good long-term business drivers.