Consolidation is alive and active, we've seen, having recent completed deals and pipeline assignments.
In some respects the current UK and European accounting sectors are not too dissimilar to the early 2000s consolidations. Alongside the ‘normal’ trade purchases and M&A in this sector, Vantis, Tenon and Numerica were acquiring independent practices at premium prices. In the background, American Express and HR Block were also preparing for their UK and mainland European ventures.
Currently, however, the consolidators are not quoted companies, although some aspire to be in the near future.
As per press announcements in recent months, Baldwins with the backing of HG Capital (PE Business), are serial acquirers. Baldwins have moved from an independent acquirer of relatively small practices to a PE-backed acquirer. In the last 18 months, they have changed their target focus with the acquisition of some good quality larger firms - CLB, Davisons, Cassons and Rowlands to name a few.
PEs' motivation
If the PE firm operates according to type, one would expect to see the current flow of acquisitions to continue for another 12/24 months followed by a period of service level consolidation within the group, national branding and a profiling period before the anticipated ‘event’ via IPO, onward sale to another PE firm or renewed investment. This is typical of the process we have seen in the corporate service sector for the last five years.
There are other players in the UK accountancy consolidator market still offering unquoted equity in the hope of looking at some future IPO or quote. Frequently, these will fail for exactly the same reason that most accountants would advise their clients against selling for a future promise, which is untried, untested and subject to changes in economic environment that could influence the success or otherwise of the eventual IPO.
Other consolidator models include owner-managed investors/accountants looking to generate benefits from rationalisation and the outsourcing of back offices to lower cost servicing locations, UK or offshore. These models satisfy certain types of practices with particular client portfolios, however they do not suit a strong advisory led practice...
Size for size's sake?
Consolidation in any professional service sector has to deal with one major hurdle/question; How do you move from consolidation for size’s sake (the premise of the consolidation or IPO), to a model that brings the underlying business (and additional acquisitions) together? This problem is the by-product of ‘forcing’ together of a large number of independent firms where there hasn’t been a pre-existing and stable business model and brand at the outset.
The requirement to meet the expectations of an IPO, using a simple yardstick of returns year-on-year, and creating some liquidity in the shares is a daunting task for professional service business.
It was not achieved by Tenon, Vantis or Numerica. Similar failures also occured in the wealth management consolidators; Millfield, InterAlliance and Berkeley Berry Birch. Perhaps we should look to the legal profession consolidators, Gateley and Gordon Dadds. Both have market quotations, and although the businesses have different core competencies they both have strong centralised management able to focus the entity on rationalisation, cost control and directing strategic investment.
The accounting consolidators are finding a receptive market particularly with the uncertainties of MTD and partner retirements over the next few years...
Our advice to clients is to be receptive, but also very critical in questioning what is on offer. Not only for exiting partners, but also for ongoing second tier partners who usually, with staff and clients lose out. In other words, one should consider all the stakeholders’ interests closely.
Keith Underwood is a director at Foulger Underwood
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