The rollercoaster ride that was RSM Tenon has reached a predictable end

There weren't too many winners.

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.

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.

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.

This piece first appeared on economia.

Photograph: Getty Images

Richard Cree is the Editor of Economia.

Photo: Getty Images
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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.