To consolidate or integrate?

Jon Ashworth discovers whether there are any lessons to be learned from the misfortunes of Tenon in the market of consolidation

For a conservative profession, there was always something odd about the so-called accountancy consolidators. The idea of turning to the City to raise funds to bankroll an accountancy acquisition spree was clearly not without its attendant risks.

There were more than a few knowing nods, then, when Tenon, the biggest and brashest of the consolidators, suddenly ran into major difficulties. Earlier this year, in rapid succession, the firm was hit by the resignation of its chairman and chief executive and admitted that its 2002 profits had vaporised. The Tenon share price, trading near 200p just over two years ago, had collapsed to 6p.

Only a few months earlier, Ian Buckley, Tenon's chief executive, had been confidently predicting a £100m fee income. This would have placed the firm on a par with long-established names like PKF and Horwath Clark Whitehill.

Although Tenon remains in business, it has lost some of its old swagger.

The story of the UK's consolidators is one of a three-horse race in which Tenon was previously well out in front. Following at a respectable distance was Numerica, built around Levy Gee, a successful Top 20 firm. Trailing down the field was Vantis, built around four small practices. Tenon has thrown its rider, leaving Numerica and Vantis to close the gap steadily. But it's still a long way to the finishing line.

Difference in approach

If Tenon's rivals are privately gloating over the group's misfortunes, they are careful not to let it show. Bad publicity rubs off. But there is a difference in approach between the firms.

Numerica and Vantis both like to be called integrators, not consolidators. Tenon raised piles of money and used it to buy up, or 'consolidate', accountancy practices around the UK. Often, the only thing in common was the Tenon name.

Numerica and Vantis have adopted a more conservative model, using an existing firm as a platform on which to grow. Practices are 'integrated' rather than consolidated. Tony Sarin, Numerica's chief executive, says that simply buying disparate businesses and crunching them together can give rise to a raft of problematic cultural issues. The idea, rather, is to integrate like-minded practices using one firm as the linchpin.

One Numerica director likens the operation to a wheel with a hub in London and spokes radiating out into the regions.

The rationale behind Tenon was ambitious. Buckley, a former partner at KPMG, argued that a traditional partnership was artificially constrained. 'We believed that the accountancy profession needed to be able to invest in people, systems, IT and new services,' he said. 'All of those required capital but, in a traditional partnership model, that capital is limited to the amounts that the partners wish to put in.'

Tenon raised £50m on the Alternative Investment Market (AIM) in March 2000. The plan was to buy smaller UK regional firms and build a network servicing the needs of SMEs and owner-managed businesses. But the warning lights were soon flashing. A forecast 2001 profit of £6m turned into a disappointing £678,000. Profits in 2002, forecast at £14m, transmuted into a more modest £4.3m.

Taking into account exceptional costs, goodwill impairment and amortisation, Tenon recorded a pre-tax loss for 2002 of £114m.

Buckley quit in February 2003. His successor, Andy Raynor, a former BDO Stoy Hayward partner, is presiding over a recovery exercise which involves exiting from non-core business areas and radically reducing costs. Tenon's Dover Street head office has been closed. The changes are expected to result in exceptional and non-recurring charges of about £12m.

Raynor says Tenon still has good businesses and is strong in areas like tax planning and corporate finance. 'It's about making sure we emphasise our strengths,' he says. 'All the businesses that came in were strong and we've got to make the people in them remain motivated.'

Numerica raised £30m floating on AIM in October 2001. From the outset, Sarin was clear about his business model. 'We call ourselves an 'integrator',' he said. 'We have a core and we are getting other firms to join us.' Numerica's strengths included a good IT platform and good people.

Months before Tenon hit its rough patch, Sarin was hinting at the dangers involved in the consolidation business generally. 'Consolidation in a people business does not necessarily work because of the turf wars and other sort of ego issues that one can get into,' he said. In light of what subsequently happened, he adds: 'Any public company that cannot meet its expectations is going to suffer. I don't think it's the sector as such. Tenon had its own issues in terms of the way it was dealing with its business model. We are a different model, and I'm firm in my view that this is a model that will work.'

Numerica's goal, he says, is to integrate businesses in a measured way, being careful not to rush things, with a view to building long-term shareholder value.

Tenon has been rocked further by the defection to its main rivals of several high profile figures. Maurice Fitzpatrick, the well-known economics commentator, recently quit Tenon for Numerica, where he is now tax director and head of economics. Mike Bailey, former senior partner of Morison Stoneham, bought by Tenon in 2000, has since joined Vantis.

But with a 1,650-strong workforce, 31 offices and an acquired annual turnover of more than £85m, Tenon has too much momentum to be written-off entirely.

Vantis, which floated on AIM in May 2002, raising £4.5m, was formed by the combination of four firms, fronted by the old London practice of Morgan, Brown and Spofforth (MBS). Paul Jackson, Vantis' chief executive, and Paul Ashton, director in charge of mergers & acquisitions, were both long-standing partners in MBS.

Corporate model benefits

That firm, although a partnership, had been run along corporate lines for four or five years before the conversion into Vantis. The corporate model removes the problem of having '25 people round a table trying to run a business' and allows access to capital.

Ashton says: 'We feel we are an attractive route for people looking to retirement and seeking to capitalise on the goodwill built up over the years. For younger people, there is the attraction of share options and the ownership element.'

While the more cautious integrator approach appears sound, it is too early to judge how successful such ventures will prove in the long term. Indeed, 'consolidators' elsewhere have also hit problems. Stockford, an Australian consolidator, was placed in administration in February. In America, observers point to the travails of Century Business Services, which has seen its share price collapse from $25 in 1998 to less than $4 currently. The company was hit by class actions from former partners of the firms it acquired.

If Tenon overreached itself, there is some sympathy for Ian Buckley. He pioneered a new corporate structure for accountancy practices. One former Tenon executive says: 'There's no question that Ian had vision. The problem was, he was never really able to put the Tenon footprint on the regional offices in the way Numerica has done.'

Either way, the idea of Tenon or Numerica coming from nowhere to challenge firms like Grant Thornton sounds increasingly unlikely.

Jon Ashworth is business features editor at The Times.