RSM McGladrey, H&R Block, McGladrey & Pullen Expected to Announce Deal

McGladrey & Pullen and H&R Block subsidiary RSM McGladrey are expected to announce a deal as soon as tomorrow resolving the lawsuit over their terminated services agreement.

RSM and McGladrey & Pullen have been locked in mediation and arbitration ever since M&P terminated the 10-year-old services agreement in July. The two firms have operated in an alternative practice structure since 1999, with M&P focused on audit and attest services, and RSM providing other types of accounting and tax services.

Under their services agreement, RSM had provided accounting, payroll, marketing and other administrative services to M&P in return for a management fee. After M&P elected to terminate the agreement in July, RSM filed suit and then Block filed to terminate the agreement in September (see Feathers Fly over Block/M&P Divorce and Block Files to Terminate Services Agreement).

The arbitration ruling, which was handed down Nov. 24, reportedly favors H&R Block and RSM, enforcing the restrictive labor covenants involving employees of the two firms. Both RSM and M&P have reportedly worked out an updated services agreement, according to a source.

The McGladrey partners began meeting in Florida on Wednesday and are expected to vote on the agreement Thursday, although the M&P board has already approved the deal. An announcement is anticipated Thursday or at least before Christmas, depending on how the vote goes, and any last-minute details that need to be worked out.

“About 650 of the partners are meeting in Orlando today and tomorrow to hear the results of the binding arbitration," said Allan Koltin, CEO of PDI Global, a Chicago-based consultancy to the accounting profession, which has worked closely with both firms. "When the dust clears, the marriage (or affiliation) of RSM and M&P will continue on. The economics will change slightly favoring RSM partners so that instead of keeping 65 percent of the profits, they will now keep 67 percent of the profits, with the other 33 percent going to H&R Block. There may also be some additional capital requirements for the partners of M&P.

"There will be some things that will still need to be worked through, but I’m sure a lot of the partners will be glad it’s over," he added. "Sometimes in business you just have to agree to disagree and move on."

H&R Block president and CEO Russ Smyth talked in an earnings call Tuesday about the pending resolution of the dispute after the company announced that the arbitration ruling had been handed down and that the two firms were continuing their negotiations on changes to the current arrangements that would allow the collaboration to continue.

"The news as you saw if you read the press release this morning are that we have recently received a final and binding ruling from the arbitration panel," he said. "For now, the rulings of that panel are subject to a confidentiality agreement. We continue to have very positive and productive conversations with the McGladrey & Pullen Board and we are very optimistic that this is going to be settled within the next few weeks. I did see there was at least one headline this morning that used the word that this situation was resolved and I want to reinforce we chose the words in our release very carefully. While we’re very optimistic that this will have a good outcome, we are not across the finish line yet. I want to make sure that that is clear to everyone because I don’t want anyone to leave with a misunderstanding of exactly where we’re at in this situation."

Koltin believes the two firms may emerge stronger after the agreement is finalized. "RSM/M&P (along with the entire accounting industry for that matter) are in a ‘dog fight’ on pricing that won’t go away for a long time and they need to be as united as can be without further distractions," he said. "While some would suggest the arbitration hurt the firms, I personally think they will walk away stronger and much more profitable in the future. Remember this all started over economics between H&R Block/ RSM and M&P. In the end, they had a common goal which was to become much more profitable and I think you will continue to see some moves that will continue to be in that direction.”