A CPA FIRM GOES PUBLIC

The recent H&R Block acquisition of the nonattest assets of McGladrey & Pullen, the seventh largest accounting firm in the United States, according to published rankings, can be viewed from two perspectives. On the one hand, it represents a mammoth leap forward for H&R Block in its efforts to build a national network of accounting, tax, and consulting services. When McGladrey's revenues are added to those of the eight firms previously acquired by H&R Block, the total will approximate $400 million, placing it well ahead of the other consolidators.

On the other hand, the deal might be viewed as McGladrey & Pullen going public. Unlike some of the other acquisitions, roll-ups, and alliances being formed, the immediate objective from McGladrey's perspective is not to create one-stop shopping for their clients. It is to provide the capital and resources needed to make the McGladrey organization the dominant provider of accounting and consulting services to the middle market.

In an interview with Mark Scally, CEO of RSM McGladrey, The CPA Journal learned that the intent is to grow the organization from its present 3,000 people to 10,000 by the year 2005. Scally commented, however, that in the process it is quite likely that the organization will broaden its offerings either internally or through alliances in order to be able to satisfy all client needs, including a wide range of financial and investment services.

Scally indicated the operating structure would be as follows: RSM McGladrey, with revenues over $200 million, will provide the nonattest services. Unlike the other consolidators, there will only be one entity, providing attest services, McGladrey & Pullen LLP, with revenues in the $100 million range. The LLP, under managing partner William Travis, will employ the CPAs doing the attest work. RSM McGladrey, with Scally as chair and CEO and Tom Ratherman as president and COO (both former managing partners of McGladrey & Pullen), will employ the other professionals and administrative staff. There are working agreements between the two entities for sharing of staff and facilities.

RSM McGladrey and McGladrey & Pullen LLP will continue to be members of RSM International, ranked number 10 in the world with 400 offices in 75 countries. HRB Business Services, the subsidiary used by H&R Block to operate the eight accounting practices acquired before McGladrey & Pullen, will ultimately become part of RSM McGladrey.

The McGladrey & Pullen firm did not have a large presence in the northeast section of the United States. As part of the H&R Block acquisition, its New York office sold its sizable mutual fund practice to PricewaterhouseCoopers, to eliminate independence issues that could be raised if any of the mutual funds were to purchase shares in H&R Block. This will further reduce the firm's presence in the region. According to Scally, RSM McGladrey will be looking for opportunities to expand in the northeast.

With the acquisition, H&R Block becomes the dominant player among the alternative practice structure entities. Will it be long before the attest partnerships having relationships with consolidators seek to change from a confederation of firms to a nationally recognized one in the image of McGladrey & Pullen LLP? *

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