The silly season has come late to the accountancy industry this year. When Coopers & Lybrand and Price Waterhouse announced their engagement, the complaints from FDs were barely audible. Now KPMG and Ernst & Young have decided to jump on the merger ship the annoyance is much more palpable.
It is hard to find anyone who can give a convincing explanation of the true rationale behind the tie-up – aside from the FDs who suggest it is all for the benefit of the bank balances of the top people involved. The firms say the move allows for greater service levels for their clients and means they can invest more. But KPMG and E&Y admit that while the chief executives they have talked to welcome the move, the FD is often more sceptical grumbling about a looming lack of choice.
We will have to see if world-wide competition authorities agree with the grumbles. Although the cynic might think that two proposed mergers will certainly inflame the interest of the regulator. If both get the thumbs up that’s great for the new entities; if they both get thrown out, KPMG and E&Y have done themselves – and a few others – a favour by blocking C&L and PW, especially in the US.
This may be a hard truth for UK-based FDs to swallow, but London is not the driving force in the jockeying for position among the top accountancy firms. These proposed mergers were conceived in the US and will be driven through in the US. The Americans may realise they are part of a larger international set-up, but deep down they truly believe what is good for US business is good for the rest of the world. Even if by dint of competition authorities or by the natural process of market forces, a few clients are lost in Europe or the Far East in, say, retailing, banking or utilities, then it will be seen as a price worth paying. FDs can leave the competition worries to politicians and civil servants. The only objective of FDs is to ensure their organisation gets the best deal from these professional advisers.
When merger one was announced the UK’s Hundred Group of Finance Directors was muttering about a lack of competition, conflicts of interest and the possibilities of price rises. Even merger two hardly represents a devastating crumbling of choice when the FD needs professional help. Recent history suggests FDs have audit and other professional adviser costs firmly under control. It is hard to see how the Big Six falling to the Big Four will lead to prices going up. Probably the biggest challenge clients of the merged firms would have is to ensure those cost savings squeezed out by economies of scale will be passed onto the client and not just retained as profit for the mega-firm.
The fact is that at the moment when FDs of international companies decide to put work – especially the audit – out to tender, a first cut is made where currently three out of the global firms are asked to submit formal tender documents. If the mergers go ahead, FDs may feel obliged to put the merged combines on the list, but they may now decide to talk to the lot. Although size may get firms on the short-list it doesn’t mean they will win the prize. While global reach and promises of superb service levels – as well as free consultancy goodies – may help to sway the decision, the bottom line for the group FD and his colleagues around the world is how they get on with the teams they see at the formal presentations and the series of meetings in the run up to the decision.
That is the mundane reality, whatever the talk about “seamless global support and unprecedented levels of expertise that, until now, were simply not available from any one organisation”. All of the top firms could audit any company in the world. The ultimate deciding factor is the human touch, not the technical competence.
FDs of international and global concerns are looking for more than standard audit approaches and service levels which have become a given over the last few years. FDs and their colleagues have been disappointed by a lack of a standardised culture throughout the world-wide firm. FDs want to know that they can deal with one senior partner who can make things happen for them anywhere across the globe.
While audit remains a commodity service which doesn’t excite the FD, there still remains plenty of choice when it comes to deciding who helps out with the tax and other consultancy services. Of course, you can choose your auditor, or a rival, or a niche player. The reality is that fallout from professional service firms’ mergers only increases that choice. The first priority remains to find the best deal for the FD’s organisation, wider implications come a very poor second. The players are keen to stress that this merger will work for global, national and local companies in markets across the globe. They are promising to help clients, regardless of size, to formulate and implement strategic solutions which drive growth and improve business performance. But can this realistically be achieved?
While quoted companies are exclusively the preserve of the big boys, the big firms are fighting it out with their medium-sized rivals for work from the FDs of the private, owner-managed, mid-corporate and growing business – call it what you like – sector. Top management at PW/C&L and KPMG/E&Y can discern fairly easily how top clients will react to the tie-up, but they must be much less certain how the FD of an owner-managed business will feel. The reaction of a private company in Ohio might be the same as its counterpart in Oxford. If they are happy to stick with the merged firms regardless of what happens to partner, staff and fee then the merger would be a rip-roaring commercial success.
If, however, too many of the bedrock clients decide they are not wanted and drift slowly away then the merger simply does not stack up. In essence, while the FDs of the quoted companies will be heard in the run up to the merger going through, it will be the FDs of the owner-managed businesses across the world who will ultimately determine whether the move turns out to be a sound commercial proposition.
Peter Williams is a freelance journalist.
Was this article helpful?
Subscribe to get your daily business insights