Acquisition strategy blamed for RSM Tenon's woes

IN SEPTEMBER RSM Tenon posted a 57% increase in operating profits for the year ended 30 June 2011. Four months on, the chief executive and chairman have been forced to step down from the company.

Andy Raynor and Bob Morton, chief executive and chairman respectively, have left the company after it revealed that it expected to report a loss for the six months to 31 December 2011 and that revenue will fall by around 10% on the corresponding period in the previous year.

Following a comprehensive review of the company’s financial accounts by its new finance chief Adrian Gardner, RSM Tenon’s latest trading statement revealed it could be forced to restate its financial year results and incur some non-cash restatements to its year-end accounts.

According to Gardner the revenue restatement should not be blown out of proportion as “we are not talking very big numbers here”, he told Accountancy Age.

But the fall in revenues does represent quite a turnaround for a company which posted a 31% increase in revenue and 12% increase in profit before tax for 2010. This double digit rise followed on from the integration of former rival firm Vantis, which RSM Tenon acquired components of in June 2010 for £7m.

However, problems for RSM Tenon appear to have been brewing since last year’s results when it cut its dividend to 0.55p from 1.6p.

The dividend cut spooked investors and sparked an immediate dip in the firm’s share price. Things continued to deteriorate with the share price slumping by 70% between September 1 and January 20. Sentiment may also have been damaged by the firm’s 2009 acquisition of Bentley Jennison for £76m in 2009.

The deal made Tenon the seventh largest firm in the country. However, one analyst claimed that the acquisition may “have been a step to far” for the company as it tried to integrate the business in the face of difficult financial headwind and could have been the beginning of the end for Raynor and Morton.

Tenon said “pricing and similar underlying trading effects” account for around half of the 10% revenue decline revealed in the trading statement, with the balance arising “from updated accounting estimates”.

Justin Bates, an analyst covering Tenon at Keefe, Bruyette & Woods, questions whether the accounting adjustments relate to “impairments associated with the acquisition of Bentley Jennison, which has underperformed,” or “balance sheet-related items.”

Another City source suggested Tenon had been so focussed on proving it could successfully integrate Bentley Jennison it forgot to “warn the markets that the business was chewing up cash” although in fairness this was simply the result of “having a bigger business with bigger mouths to feed”.

CFO Gardner agrees the company suffered under the weight of operating costs associated with integrating Bentley Jennison and parts of Vantis, including the London, Leicester and Epsom offices.

“We had to do rebranding and change the way we do business. There was a lot of internal change. As the business grew the cash required to support it has grown,” he says.

“It is not so much a case of being a bigger business with bigger mouths to feed, it represented a large chunk of our costs and was more than we had expected.

“At the time the acquisition was made people were more cheerful post Lehman. There was an expectation that we were heading into a period of benign economic activity, which turned out not to be the case.”

City analysts and market commentators also suggested Tenon struggled to perform as a listed accountancy firm.

“A lot of City opinion has been that accountants don’t make good quoted businesses,” one analyst said.

But Gardner disagrees that being a listed firm is a broken model.

“The way in which we let our operating cost structure evolve is not necessarily the result of being listed,” he says. “The cost of being quoted is not especially expensive.”

According to a City source, another difficulty for the firm has been its position as a mid-market firm with SME clients, which meant it didn’t “get the cream of the big deals of the smaller dross. That is a difficult space to work in during a recession.”

Whatever the reasons for the adjustment – which is likely to become clear when the company reports its results for the last six months of 2011 on 29 February – the profit warning was enough to bring Raynor’s tenure at the firm to an end.

“Sadly his position became untenable after another profit warning. It is a shame because he did a good job over the last few years,” analyst Bates says.