Big Four feathers unruffled as BDO chokes on cornflakes
Double congratulations to
Michael Cleary and David Maxwell. The senior partners of Grant Thornton and
Robson Rhodes have not only tabled the biggest accountancy firm merger since
Price Waterhouse and Coopers & Lybrand in 1998 (we'll leave aside the
post-Enron, shotgun marriage of Deloitte and Andersen), but they also managed
to keep it under wraps until this weekend.
No mean feat, given the general
leakiness of most partnerships.
It's an interesting and significant deal, though it will ruffle fewer Big Four feathers than some commentators have suggested. The FT's Alphaville column remarks this morning how 'the Big Four accounting firms face a threat to their dominance in the blue-chip audit market' once the deal is completed in July. Other papers have taken this at face-value too, albeit adding a caveat or three about the relative size of the combined firm and Ernst & Young, the smallest of the Big Four.
But will blue-chips suddenly rush
to the new Grant Thornton for audit services? I doubt it, though that may well
come in a trickle rather than a flood in time.
It will, however, have caused a
few BDO Stoy Hayward partners to choke on their cornflakes on reading the news
in yesterday's Sunday Telegraph and Sunday Times. I presume Cleary will have
let Jeremy Newman, his counterpart at BDO, know the results of the partners' vote;
the two have presented something of a united front in the battle against Big
Four dominance. All eyes will be on Newman's blog in the coming days for signs
of his reaction. Certainly, though, it is a blow to his ambitions as it puts
increased distance between the two firms. BDO's fees for 2006 were £275m – GT's,
including Robson Rhodes, would have been £360m.
On the basis that to make a
material difference to your revenues you have to merger with a top 16 firm (these
are the ones generating fees in excess of £50m), who might BDO be eyeing?
Well, fees per partner at Smith
& Williamson and Tenon are comparatively low, though the latter is listed and
the former could soon be, which would complicate arrangements. However the
really vulnerable firms look to be PKF, which grew by only 3% last year, though
its fees per partner are pretty healthy. And Moore Stephens which grew by just 7.3%
and is generating just £535,928 per partner. That can't be generating profits
that, with all the risks attached, are worth getting out of bed for.
It's going to be an interesting
summer.
Although the combined firm wont reach the almost 400 million pound GT will have in the near future seems to me a “merge/acquisition” of some third tiers firms to be the best strategy on BDO.
UHY or Kingston Smith seems better placed to fill the GAP than larger firms as Moore Stephens or PKF.
Posted by Anonymous | April 30, 2007 12:31 PM
It's going to require quite a few of them....
Posted by Damian Wild | April 30, 2007 2:39 PM
Logic (mine that is) dictates that BDO and the new combo should come together as quickly as possible to get close to the magic £1bn revs as they can. that's the only way they'll be big enough to make serious impact. They'd also gain from cost savings.
Posted by Denn is Howlett | April 30, 2007 5:57 PM
This merger and the coverage of it just propagates the assumption the size is an indicator of quality in the audit and broader professional services market.
What does this merger do for GT? What can RSMRR do that it can't do already?
Any geographical advantages? Well the only places RSM has coverage where GT doesn't are Hemel and Dublin. And presumably the Dublin office will go to GT Ireland anyway(?).
The whole move is build on the sacred turnover numbers - sheer vanity.
Where is the logic in merging with smaller firms which typically have a portfolio of smaller clients and saying this leaves you better positioned to service FTSE 350 companies?
Posted by Anonymous | May 1, 2007 12:56 AM
i think this merger will just shake up all the networks in mid market.
It makes good sense also as some one will have to make the market open for all parties. After all those already big firms were also made by mergers .
i thought **gt and bdo will merger but it did not.
thanks
Posted by jimmy | May 6, 2007 3:14 PM
Good point, Jimmy. I think we will see fall-out from the shake-up (forgive the mixed metaphor) over the summer. And I share your view, anonymous poster of 1 May, that this merger will fail to persuade any FTSE350 companies that GT+ is a more serious player if they weren't previously convinced. I'd add though, that the merger might bring that point in time a little nearer if the combined firm can capitalise on economies of scale.
Posted by Damian Wild | May 14, 2007 10:43 AM