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|CAROL E. CURTIS is a financial writer based in Darien, Connecticut. She is the investments editor and featured columnist for U.S. Banker and a former editor at Forbes and Business Week.|
etty Fisher is a wealthy divorcee in a Connecticut suburb who received a large settlement when her marriage of 30 years ended. Besides a block of stock in her husband’s business worth over $6 million, she was awarded monthly alimony of $25,000. When the settlement was reached, Mrs. Fisher (not her real name) had three professionals to help manage her money: an accountant who did her taxes, an investment manager who made decisions about her portfolio and a financial consultant at Merrill Lynch who executed the trades and sometimes answered questions.
Mrs. Fisher doesn’t like the fact that each of these professionals needs access to her personal financial records. She also dislikes the time it takes to deal with each one separately. “At this stage of my life, I want to free up my time for other things.”
Mrs. Fisher currently is looking for a single person who can handle all her financial affairs. The trusted professional who gets the job—whether it be a CPA, financial planner or a combination—holds the key to the future of financial services. That’s because clients like Mrs. Fisher, along with business owners and other high-net-worth investors, are making it clear they want a single source for most of their financial needs. And the financial services industry—be it through banks, insurance companies, broker–dealers, financial advisers or accountants—is transforming itself to provide it.
Did we say CPAs? “The paradigm shift has occurred; the consumer is asking for one-stop shopping,” declares Barry Melancon, the president and CEO of the AICPA. As a result, Melancon argues that financial services firms, including accountants, must position themselves to provide a wider array of services. He sees this as the main driver of consolidation, which has literally taken the accounting profession by storm.
How Many Firms
Source: The Practicing CPA .
WHO IS BUYING?
The consolidation freight train began to seriously gather steam about three years ago, when a small division of American Express called Tax & Business Services Inc. began to aggressively acquire accounting firms. To date, the AmEx division has acquired approximately 35 firms. Hard on the heels of AmEx came Century Business Services Inc. of Cleveland, which over the past two years has turned into a major player with the acquisition of 40 firms. Most recently, the Business Services division of Kansas City, Missouri-based H&R Block Inc. (HRB Business Services) acquired 5 regional accounting firms and 5 smaller ones. In April, HRB announced it had acquired McGladrey & Pullen LLP in Bloomington, Minnesota, the country’s ninth largest accounting firm.
Other potential players, including Chicago-based CenterPoint Advisers Inc. and Integrated Professional Services in New York City, are in the wings, though neither has confirmed an acquisition.
Who—or what—is driving this train? Those at the top of the accounting profession say it is none other than the Mrs. Fishers of the world. “You go to business conferences, and what do you hear?” asks Melancon rhetorically. “Everyone says you have to build an organization that offers one-stop shopping. So CPA firms are going to position themselves to provide what the consumer wants—this is a major driver.”
Another driver is the financial needs of the firms themselves. There are an estimated 70,000 firms in the United States, which constitute a universe of motivated sellers. In addition to the prospect of unfunded retirement at many of these firms, there is a need for capital—and access to public equity markets offers a new, untapped source of financing. Accounting firms also are experiencing growing difficulty in attracting, and keeping, qualified professionals. Who can blame graduates who succumb to the lucrative lure of Wall Street? Often, CPA firms look to a consolidator for the incentives, such as stock options and growth opportunities, to attract and retain top talent.
Meanwhile, the profession is experiencing solid growth, with the demand for tax, accounting and consulting services increasing by 5% to 8% a year. When it comes to offering professional services beyond the traditional narrow area of accounting, this universe is ideally positioned to benefit. “The CPA is in a very strong position to offer these services,” argues Melancon. “But CPAs have so far not reaped the benefits.”
Not, that is, until the brave new world of consolidation opened before them—offering cash, or stock, or a combination of the two, plus other inducements to partake in the riches of the booming financial markets that have fueled Wall Street’s phenomenal and seemingly endless bull market. That is one reason why this freight train is unlikely to slow down anytime soon.
“Consolidators are going after market share. It is pretty aggressive,” says Gary Shamis, a partner in the still-independent Cleveland firm of Saltz Shamis & Goldfarb, Inc. As Shamis sees it, there are three main competitors in the race: AmEx, Century and HRB. Until the other potential players make acquisitions, they are just “wannabes,” he says.
With that in mind, here’s a look at the very different strategies of the three consolidators, along with pros and cons of the deals they offer. Then, the article examines the regulatory implications of this seemingly unstoppable train, along with alternatives available to those who can’t, or won’t, climb aboard.
|If the Consolidator
I f a consolidator contacts your firm, what should you do? We put that question to several experts, including Dave Cottle, a consultant to CPAs based in Stuart, Florida. Cottle’s first piece of advice: Call in an independent professional like himself for help. If you don’t want to do that—to date, most deals have not involved a middleman—you may decide to contact a CPA whose firm already has been purchased to hear a first-person account of the pros and cons of selling to a consolidator.
That is the advice of David E. Schlotzhauer, a partner of the Leawood, Kansas, firm of Mills & Schlotzhauer and immediate past chairman of the AICPA small firm advocacy committee. Before considering any offer, Schlotzhauer says, your partners should decide on new service niches they believe the firm can do well and those they never want to offer. In addition, “you should evaluate carefully the acquirer’s overall business plan and see how your practice would fit into the plan,” says one consultant.
You also need to evaluate the offer, which will be in cash or restricted stock in the consolidator’s company or both. Cash offers currently run from one times gross revenues up to a maximum of 1.3 or 1.4. The issue of restricted stock is sensitive because it involves market risk. For example, if you accept stock at $85 per share with a three-year restriction on selling, it could fall to $25 within those three years. If that happens, will the consolidator give you more shares to compensate for your losses?
In sorting out such issues, keep in mind that your caller will be a savvy, experienced professional negotiator whose job is to get the best possible deal. “If you anticipate the transaction will be large, calling in a consultant might not be a bad idea,” says Schlotzhauer. One expert likens it to selling your house: A listing agent often can get you a better deal.
There is also the personal dimension. Because you still will be in business with the consolidator after concluding the deal, you should look at the deal as an entrance, not an exit, strategy.
Where do you find an agent or consultant? Newsletters are one source, as are colleagues in the accounting profession. However, you should remember that, when you talk to someone employed by an acquired firm, that CPA is now a part of a large consolidator and probably will not be speaking objectively.
Cottle tells of a recent negotiation when he was called in after the firm had read his newsletter. He flew out to a miniretreat with the partners, where he analyzed both the CPA firm and the offer and gave the firm some hard questions to ask the consolidator. The result? The firm decided it had not gotten satisfactory answers and did not proceed with the negotiation.
“Part of my role was to help the partners reach a consensus,” says Cottle. “I helped them surface this fact.” Cottle then made recommendations on what to do with the firm in order for it to remain successfully independent.
Such advice doesn’t come cheap. Daily consulting fees easily can run $4,000, although many consultants also operate on a contingency-fee or fixed-fee basis. Still, such professionals are likely to be increasingly sought after, as the demand for good accounting firms grows.
AMEX: INSIDE THE BLUE BOX
“We are a professional services entity and not a consolidator,” says Jeff W. Yabuki, the American Express Tax & Business Services CEO. By whatever name, AmEx is the oldest and most aggressive acquirer of accounting firms. But while it is 13 years old, Yabuki’s division began to grow its business significantly just three years ago. Since then, it has acquired 35 CPA firms, including New York’s Goldstein Golub Kessler & Co., formerly the nineteenth largest CPA firm in the country. At the time of the deal last year, GGK had 56 partners, more than 400 employees and $44.4 million in revenue. AmEx now ranks as the tenth largest accounting firm in the United States, with more than 1,200 employees in 20 states.
The strategy behind all its acquisitions is the same, according to Yabuki. “AmEx is a big brand name, but not in the professional services area,” he explains. “At the same time, the CPA profession doesn’t have a national presence in the small to midsize category of CPA firms. The thought was that this would be a powerful combination.”
The range of firms AmEx has acquired is broad, from $200,000 in revenue up to its largest, GGK. The deals involve cash rather than stock in AmEx. “There is a lot of market risk associated with stock,” says Yabuki. “It also potentially creates independence issues.”
AmEx generally acquires the tax and consulting practices, leaving the attest work under the original firm and still owned by the firm partners. For attest work, the partners lease staff from AmEx. Often, this causes the original accounting partners to wear several hats—as in the case of Susan Menelaides, a partner of the Chicago-based accounting firm Checkers, Simon & Rosner LLP. When AmEx took over the firm in 1997, it gave Menelaides dual employment as a managing director of AmEx and a partner of the accounting firm. While regulations require her to perform her attest work as a Checkers partner, nothing prevents her from performing other, broader services, such as consulting for American Express Tax & Business Services.
“The acquisition was a major step forward for our organization,” she says. Besides receiving a technology upgrade, her firm has become a source for additional acquisitions. This is part of the broader strategy of AmEx. After acquiring a firm, AmEx uses the ability and strength of the local firm as a building block in its strategy of creating a national brand. “We are trying to amass market share,” says Yabuki. For example, in New York AmEx chose to acquire a major firm—GGK—because “you can’t be one-tenth of one percent in a city like New York.” To that end, he says AmEx is currently looking to do more sizable deals in New York City. Once acquired, the tax and business services part of a firm becomes an AmEx practice. Employees are put through extensive leadership training, with AmEx sponsoring 5 to 10 different programs to polish staff members’ skills in various areas, including client contact.
Employees also are encouraged to become even more active in professional and community organizations. “Our role is not to be a product distributor. It is to help clients be successful,” Yabuki insists. Nevertheless, if clients want and need additional financial services or products or both, AmEx is ideally equipped to provide them with, among other things, investment products, charge cards and financial planning. Experts agree that AmEx stands out in its established reputation and world-famous brand name. So the likelihood of failure is remote. “I have to create a company that will be here 150 years from now,” says Yabuki. “Acquiring a firm is easy. What you do afterward is not.”
A seller’s point of view. Gerry Golub, former managing partner of GGK, has no complaints. One reason may be the generous terms he was offered, which reportedly included a multimillion-dollar buyout of his practice and a bonus of more than $1 million. He became chairman of American Express Tax & Business Services, with Yabuki as CEO.
How does it feel to be part of AmEx? “It feels great,” says Golub. “You are joining a global financial services company and an elite group of executives.” A big plus, says Golub, is that it is easier to attract and retain professional talent. In addition, AmEx offers clients broader capabilities under the world-famous AmEx name. “It is exciting and beneficial,” Golub says.
Dave Cottle, an industry consultant based in Stuart, Florida, adds that the first priority of AmEx is to “keep everything in the blue box,” or under the AmEx brand. Then, he says, the first addition to a CPA practice is to make available a variety of financial and business services through the AmEx network of advisers. “AmEx has given additional capabilities to the CPA firms that are acquired. That doesn’t mean it has worked,” Cottle says. He still has reservations about whether consolidators such as AmEx actually will add value to the practices they acquire.
HRB BUSINESS SERVICES: ACCOUNTING FIRST
Although it has acquired only 10 accounting firms to date, plus the Practice Development Institute (PDI), a Chicago-based CPA management and marketing consulting firm, H&R Block has big plans. It makes no secret of its aim to open four to six additional markets soon, with a goal of 2,500 total associates over the next two years. The acquisition of McGladrey & Pullen proved it was a serious player.
“We are trying to build a national accounting firm,” says Terrence E. Putney, president of HRB Business Services. But unlike AmEx, Putney says HRB is interested mainly in adding accounting-related capabilities rather than offering additional financial services and products. Of McGladrey & Pullen, he says, “What attracted us was our business plans and what we could do for each other.”
Still, Putney doesn’t rule out cross-selling of services. While accounting and tax work will be paramount, the national firm he envisions also will offer strategic planning, forensic accounting and fraud investigations, internal audits and information technology consulting. “While it is not all still accounting, it is not quite the same reach as offering insurance or benefits,” Putney says.
Putney is convinced that consolidation still has a long way to go. “The industry needs capital. As long as we can deliver shareholder value, it will continue.”
One believer in HRB’s ability to deliver is Allan D. Koltin, senior vice-president of the Practice Development Institute. Since the merger, Koltin says, PDI has remained essentially independent. “It was seamless; there was zero change.” What HRB brought to the table was an infusion of capital so PDI could branch out into law, insurance and banking. “PDI now can grow into three different industries,” Koltin explains.
“For its part, HRB saw an opportunity to grow a company.” Of course, HRB now owns PDI and gets the profits. As Koltin sees it, it’s still a win–win deal.
CENTURY: A “RAPACIOUS APPETITE”
When it comes to the consolidator with the most dramatic and fast-moving strategy, the winner hands down is Century Business Services. It is the brainchild of Michael DeGroote, who formed Century in early 1997 by merging the hazardous waste insurance business of Republic Industries Inc. with Century Surety Corp., a niche insurance company. The merged entity was then renamed International Alliance Services, which was shortly thereafter changed to Century Business Services Inc.
“We have a rapacious appetite,” says Andrew B. Zelenkofske, the Century vice-president responsible for mergers. Zelenkofske came to Century as the product of a merger: When Century offered to buy his local Philadelphia firm in 1997, he leaped at the proposition and hasn’t looked back since. Century has closed on 40 firms on its way to building what Zelenkofske calls a “one-stop shop for all the services clients need. It’s like a Wal-Mart of financial services.”
Besides accounting and financial planning, the services include insurance and benefits administration. Century not only is considered one of the top 10 accounting firms but it is also one of the top 15 benefits administration companies.
Century looks for small to midsize CPA firms that are profitable and growing. After buying a firm, it generally does not interfere with day-to-day operations. However, CPA firm managing partners do attend monthly update meetings with Century’s officers. Unlike AmEx and HRB, Century pays for its acquisitions through a combination of cash and restricted stock in Century, a public company that trades on Nasdaq under the ticker symbol CBIZ. Over 50% of a transaction is in restricted stock, which cannot be sold for a period that varies but often is two years. Some deals consist only of restricted stock.
Besides accounting firms, Century has been buying up information technology consultants, valuation businesses and benefits companies. Zelenkofske makes no secret of the fact that CPAs who become part of Century must take a broad view of their role. “We have a program of cross-serving rather than cross-selling,” he says. “Accountants are not trained to be salesmen.”
Instead, accountants are expected to “introduce” their clients to Century’s other businesses. In one example cited by Zelenkofske, a CPA firm’s client may not be satisfied with its internal system of handling payroll. The accountant might say, “We have a payroll company we would like you to talk to. Would you like me to be at the meeting?”
“At the end of the day, we want to maximize the services available to clients,” says Zelenkofske. While experts generally applaud Century’s ambitious plans, the market has lately taken a more skeptical attitude: Century’s stock recently traded at $13, down 28% from a year ago. Still, James R. Macdonald, an analyst with Chicago-based First Analysis Securities Corp., rates it a strong buy. That is based on the expectation of long-term earnings per share growth of more than 30%, made up of 10% to 20% internal growth, supplemented by more acquisitions.
Macdonald is not without reservations. He points out that some of the CPA firms that sold out to Century for restricted stock did so when the price was $20. The market has taken it down to less than $15, meaning selling is hardly an option. “Century has been hammered by short-selling groups that say it is paying too much for the acquisitions,” Macdonald says.
Koltin, who has worked with more than 1,500 accounting firms, shares Macdonald’s reservations. He cites one firm, Mayer Hoffman McCann, that was bought by Century when Century’s stock traded at $18. “The market wants to see synergy,” he says. “The market will say, ‘Show me the profits.’ You have to prove that, together, the firms will generate profits over and above what they would have generated had they remained independent.”
The jury is still out on that issue. It also is out on some of the key regulatory matters associated with consolidation, including independence; integrity and objectivity; accepting commissions and referral fees; and contingent fees. Independence is an especially murky area. In a traditional CPA firm, the owners are mostly CPAs. The rules make it clear that no owner can have a financial interest in an attest client, which could compromise the CPA’s independence. But in the case of consolidator American Express, for example, the public owns the company. How can you tell a shareholder of American Express that he or she can’t also own IBM, which may be a client of the CPA firm?
The cross-selling that consolidators clearly encourage some accountants to do poses similar thorny issues. “Things that you can’t do as a CPA firm you might be able to do as a consolidator,” says Susan Coffey, vice-president of self-regulation for the AICPA. In Florida, for example, the U.S. Supreme Court let stand a lower court ruling that permitted an AmEx employee who was also a CPA to advertise himself as such. It also allowed AmEx CPAs to associate themselves with financial statements.
The SEC, however, takes a stricter view. Among other things, it has indicated its concern over consolidated CPAs who promote investments in companies with which their new partners have business ventures. The worry is whether the accountants might go soft on audits of the companies.
To sort out these and other independence issues, the SEC and the accounting profession jointly formed the Independence Standards Board (ISB). The ISB’s mission is to make recommendations on oversight of the consolidators and other independence issues related to the audits of public companies. “The consolidators pose a problem that has never been faced before, which is possible control of the audit firm,” says ISB Executive Director Arthur Siegel. “There is a question of influence and control. Who is the auditor—the accounting firm or the firm plus the consolidator? Deciding on that won’t be easy.”
Siegel’s biggest concern is how successful the consolidators will be in maintaining and training the people who do the audits. Other professionals agree. Shamis, whose firm rejected an offer from a consolidator, did so partly because of his concern about the next generation of CPAs. “Young people have an expectation level,” says Shamis. “The whole second generation of CPAs doesn’t have an answer to what the opportunity is going forward in the firms that have been acquired. That is a really big question.”
Some consolidators admit as much. Yabuki of American Express charges that some competitors are building profits by slashing partner compensation.
The ISB plans to issue final guidelines within the next 12 to 18 months. Until then, Siegel is under no illusions about what will happen: “There is no expectation that we can stop consolidation. The question is, What needs to be done to protect the public interest?”
BIGGER BUYERS MAY JOIN THE TABLE
Meanwhile, dynamics among consolidators continue to shift. Allegis Group, a new player just last year, announced in March that it is “withdrawing from the stable of accounting firm acquirers.” Founder Tom Stout says Allegis was unable to motivate enough “qualified firms” to accept an offer. Cornerstone Professional Advisors is rumored to have signed letters of intent, but Robert C. Basten, Cornerstone’s CEO and former head of AmEx’s consolidation group, has nothing to say at this point.
Another acquirer, Integrated Professional Services, continues with its game plan to put together three to five firms as a platform for a national group. But President David Johnson says that among the top accounting firms Integrated is going after, there is “not a sense of urgency” about being acquired.
Rather than lack of urgency, the issue may be that accounting firms want to join up with a consolidator they know and recognize. And on that score, Jay Nisberg, accounting profession consultant based in Ridgefield, Connecticut, believes new and bigger players may soon enter the game. He reasons that with more than 40 states now permitting accounting firms to accept commissions, the window of opportunity is too big and too tempting to ignore. Over the next 12 to 24 months, he predicts, several businesses—possibly including newly formed Citigroup—will become consolidators. He also doesn’t rule out the involvement of well-known corporate raider Carl Icahn or investment guru Warren Buffet. “This is amateur hour,” says Nisberg. “The real pros will sit back and then come in and clean house. One may even buy a consolidator.”
HOW TO COMPETE
Ultimately, Nisberg believes that fully 40% of all CPAs will still remain independent. In order to thrive, virtually all experts agree that these firms will need to change, perhaps even change a lot, in order to compete. One small independent firm that is already doing that is Mills & Schlotzhauer in Leawood, Kansas. Partner David E. Schlotzhauer, who is the immediate past chairman of the AICPA small firm advocacy committee, says his firm is “remaining close to clients and providing services that are comparable to those of the consolidators.” To do this, Schlotzhauer is forming alliances with other accounting firms. In some cases, a firm may choose to give up audits and do everything else in return, he says. (See “Solo But Not Alone,” JofA , Apr.99, page 35, and “CPA Firms: Future Alliances,” JofA , May99, page 27.)
Another alternative is to enter into a cooperative venture with a non-CPA firm. Rick Solomon, a CPA and executive director of the CPA Network, Inc., in Stony Brook, New York, has 70 member firms that have entered into alliances with nonaccounting entities in order to provide the same type of one-stop shopping the consolidators are striving to create. The seven-year-old alliance gives members sales and practice development coaching to enable them to compete better.
“Smaller players must realize that the expectations will be raised for the survivors,” says Solomon. His strategy, which often is referred to as “co-petition,” is designed for entrepreneurial firms that want to remain independent and build a practice. “Without naming names, there are firms that don’t like the loss of autonomy and the corporate culture that consolidators bring in,” he says. “They feel like a harness has been put on them.”
Despite such reservations, the forces driving consolidation aren’t likely to weaken anytime soon. And whether through mergers, alliances or internal change, the public accounting profession has no choice but to adapt. “We can’t be ostriches with our heads in the sand,” argues Koltin. “Let’s talk about what’s good for the consumer and work back from there.” Which brings us back to Mrs. Fisher: The way things are going, it might well be a consolidated CPA that ultimately wins all of her business. That would be good news for Mrs. Fisher as well as for a growing portion of the accounting profession.