The Big Eight is shrinking, much to the delight of the accounting industry`s smaller firms.
With six of the top eight accounting companies enmeshed in merger talks, the smaller firms see a chance to grab clients. Some are gearing up to launch aggressive marketing campaigns aimed at the merger partners` customers.
”These companies are going to be so focused on putting these deals together over the next few years that they`ll be vulnerable to competition,” said Kenneth Solomon, the Chicago-based chairman of Philadelphia`s Laventhol & Horwath. The firm, ranked ninth in the U.S. and 11th worldwide, has targeted hundreds of companies for calls and visits and plans advertisements directed at ”disenchanted” Big Eight clients, Solomon said.
”Any smart firm is going to say this is a great opportunity for us,”
agreed Arthur Bowman, editor of Bowman`s Accounting Report, an Atlanta-based newsletter. ”I`d be marketing the heck out of this.”
Some customers, especially medium-size, privately held companies with annual revenue up to $200 million to $300 million, may fear that the new accounting giants won`t pay enough attention to them, experts said. There is less pressure for nonpublic companies to hire a Big Eight auditor.
Bigger companies, on the other hand, may not want their books audited by the accounting firm employed by a leading competitor.
”If we really get to the Big Five, we`ll see some shifting of clients,” said John Burton, accounting professor at Columbia University.
Jerome Harris, managing partner of Chicago-based Checkers Simon & Rosner, said three small local companies that employ firms involved in merger discussions have talked to him about switching auditors.
Even big competitors are gleeful. ”There is no single event that`s taken place that will give us as big an opportunity as has been presented by these proposed mergers,” said Ernest Wish, managing partner in Chicago for Coopers & Lybrand, which would trail the pack at No. 5 and be the only major firm to remain alone if all the mergers are completed.
The merger wave began two years ago with the union of Peat Marwick and KMG Main Hurdman, which displaced Arthur Andersen & Co. as the world`s biggest accounting firm (Andersen remained No. 1 in the U.S.). But it gained momentum in May, when Ernst & Whinney and Arthur Young & Co. announced plans for a combination that would eclipse the Peat Marwick merger.
That news sparked a flurry of activity, culminating July 6 with announcements of an agreement in principle between Deloitte Haskins & Sells and Touche Ross & Co. and formal merger negotiations between Andersen and Price Waterhouse. If the mergers go through, Andersen would regain first place worldwide.
The six affected firms say the combinations will better serve customers, mainly by broadening their reach overseas. In addition, the mergers may bring cost savings, in the form of smaller support staffs and combined computer systems, that will boost profits in the increasingly competitive audit business.
Touche Ross has contacted all its Chicago-area audit clients to get their reaction, said Tom Flanagan, Chicago managing partner. ”Without exception, our clients big and small said the merger will provide them better service,” Flanagan said.
Clients reached by The Chicago Tribune said the proposed mergers don`t matter to them or may result in long-term benefits, such as lower fees, if the firms become more efficient. ”I don`t think it will particularly affect us, and I probably regard it in a positive light,” said William N. Lane, chairman of Northbrook`s Lane Industries Inc., an Andersen customer.
But some industry observers say the would-be merger partners, especially Andersen and Price Waterhouse, may be underestimating the challenges involved in uniting vast professional-services organizations.
Andersen and Price Waterhouse have a total of 653 offices and 83,000 employees, including more than 4,600 partners. The two firms, which agreed to negotiate for 60 days, have different corporate cultures and public images, with Andersen known for its hard-charging style and Price Waterhouse seen as more conservative and somewhat aloof.
In addition, Andersen recently has been rocked by conflicts between its fast-growing consulting business and its audit and tax operations. To stem further defections by consultants, the firm in January agreed to a
reorganization granting more power and pay to consultants.
Though Andersen consultants worry about maintaining their enhanced status in a combined organization, Price Waterhouse consultants fear being engulfed in the bigger Andersen operation, sources at other firms said. Consulting represents about 40 percent of Andersen`s annual revenue but only about 18 percent of Price Waterhouse`s.
”That one really makes no sense to me,” said Columbia`s Burton. ”It`s hard to believe it isn`t going to create many internal conflicts that may outweigh the (positive) effects from merging. There isn`t an obvious cost saving here or situation where they can`t compete.”
Some turmoil at the six affected firms seems inevitable. For instance, the firms will have to combine operations in major cities, relegating one set of local office and practice heads to less important jobs.
”There will be partners who will find it intolerable to continue,” said Wish of Coopers & Lybrand.
Since the Peat Marwick merger, about 70 percent of former Main Hurdman partners have left the combined firm, said Bowman. Some clients were upset by the disruption and shifted auditors, he said.
Industry sources noted, however, that Peat Marwick was much bigger than Main Hurdman, though the current merger partners are more equally matched. And despite the exodus of partners, the combination is widely regarded as a success because it strengthened Peat Marwick`s international position.
Customer and personnel fallout from the current mergers is still a concern. Howard Stone, managing partner of Chicago-based Altschuler, Melvoin and Glasser, said his firm has ”received inquiries” from clients and partners of the affected firms.
”This is a major statement to middle-market clients” that the big firms will be focusing on multinational customers, said Stone. His firm, which specializes in family-owned companies with annual revenue of less than $300 million, will soon begin a mail and telephone campaign targeted at certain Big Eight clients.
For bigger companies, the mergers may be unsettling if they combine auditors of two leading competitors. Ernst & Whinney, for example, is the auditor for Coca-Cola Co. and Arthur Young does the job for PepsiCo Inc.
A spokesman for PepsiCo said his company isn`t concerned about the merger. ”We have the highest respect for Arthur Young`s integrity,” he said. A Coca-Cola spokesman didn`t return phone calls.
In a local example, First Chicago Corp. employs Andersen and Chicago`s Continental Bank uses Price Waterhouse. First Chicago declined to comment. Hollis Rademacher, chief financial officer at Continental, said he doesn`t foresee any problems. ”It`s just like our banking both Ford (Motor Co.) and GM,” he said.
Though some companies may perceive a conflict, such instances are expected to be isolated. ”These accounting firms do a good job of insulating confidential information among employees,” said Roman Weil, accounting professor at the University of Chicago.
Weil noted that Big Eight firms audit many fierce competitors in-house;
Arthur Young ”audits virtually every big company in (California`s) Silicon Valley,” he said.
Other perceived conflicts may create stumbling blocks, however. For example, some clients don`t want their auditors to do certain kinds of consulting jobs for them.
”I`m already starting to observe worry by merging firms that they`ll have to drop (audit) engagements” because of consulting work done by their merger partners, Weil said.
For now, most customers don`t seem concerned. ”It`s meaningless for us,” said Robert Knight, chief financial officer at White Hen Pantry Inc. in Elmhurst, which is audited by an Andersen unit that specializes in family-owned, privately held businesses. ”We`re already segmented away from the major companies.”
But ”it`s impossible to serve everybody when you get so big,” said Richard Drexler, chief executive of Chicago-based Allied Products Corp., which switched from Andersen to Laventhol & Horwath eight years ago. For clients considering such a shift before, the mergers ”would push them over the brink,” Drexler said.
