And then there were four.
Mergers swept through the top tier of the public accounting field again Monday with Ernst & Young LLP and KPMG Peat Marwick announcing they intend to join forces to create the world’s largest accounting/consulting firm, with about $13 billion in annual revenues.
The news comes only a month after two other Big Six public accounting giants, Price Waterhouse and Coopers & Lybrand, said they were merging.
The rationale behind both mergers is to better meet the needs of global corporate clients who demand a wide variety of services all around the world, not just in a headquarters city or nation.
Thousands of jobs locally may be affected by the deal. In Chicago, E&Y has about 2,200 employees and 175 partners, while KPMG has about 1,450 employees and 112 partners.
Among E&Y’s biggest local clients are McDonald’s Corp., Fruit of the Loom Inc., ABN AMRO LaSalle National Bank, Aon Corp. and Whirlpool Corp. KPMG’s client roster includes Motorola Inc., Platinum Technology Inc., Spiegel Inc., FMC Corp. and DePaul University.
The combination may also intensify pressure on Andersen Worldwide–whose two operating units Arthur Andersen & Co. and Andersen Consulting are Chicago based–to find a merger partner of its own to reclaim the No. 1 ranking it has held for years.
Though it has worldwide revenues of $11.3 billion, once-dominant Andersen will slip to third when two announced mergers go through. Rumors that Andersen has been mulling a merger have been circulating for months, but there has been no action as the firm struggles to hammer out a governing structure for its sometimes-quarreling accounting and consulting units.
The latest planned mergers within the top tier of public accounting/consulting firms raised some antitrust concerns, but few predictions that regulators in the U.S. or elsewhere would quash the deals.
In fact, the consensus is that the combinations will be a plus for the firms, their clients and second-tier competitors who gleefully see opportunities to snag smaller clients and disgruntled employees.
“The now-Big Four are continuing to make a decision that the middle market is not their marketplace,” said Howard Stone, managing partner of Chicago-based Altschuler, Melvoin and Glasser, whose clients are mostly privately held companies with revenues from $4 million to $300 million.
“I view it from two perspectives: First, one less competitor in the middle-market arena. Secondly, for their employees that prefer to work with the privately held middle-market company, it’s additional opportunities perhaps for their employees to contact us.”
KPMG and E&Y together would have more than 160,000 employees, 12,800 of them partners, in 135 countries. But the immediate impact of the merger, as well as the Price-Coopers combination, is unclear.
In both cases, the firms have yet to settle such details as the name of the merged entities, although they have hammered out who will have the top management roles.
What is clear is that there will be a personnel shakeout, largely as administrative duplications are eliminated. More subtle will be duplication of high-profile partner jobs.
In cities like Chicago where both firms have offices, there will be only one managing partner, not two; one head of tax, not two; one head of consulting, and so forth. In previous mergers, partners who have been bumped frequently have opted to leave.
Guesses put the number of jobs lost likely in the hundreds, not thousands, despite the size of the merged firm.
“I don’t care what they’re saying, there will be layoffs,” said Art Bowman, editor of the Bowman Report, which follows the industry.
“There are going to be some very quality people out there looking for work. A lot of little firms are going to be started up in the next few years.”
Both mergers must be approved by partners and by federal regulators, including the Securities and Exchange Commission and the Justice Department. The European Union also will look at both deals.
KPMG and E&Y’s top executives said they had been discussing a merger informally for some time.
“The timing is, of course, influenced by the recent announcement of the merger of Price Waterhouse and Coopers & Lybrand,” said Colin Sharman, KPMG’s worldwide president, who would be chairman of the merged firm.
Whereas a decade ago the industry was dominated by the Big Eight firms, consolidation has been the order of the day as players battle to follow their clients into global markets. And as traditional audit work has not grown, firms have increased their emphasis on non-accounting consulting services.
Accounting firms feared they would lose business if they were not physically present in, if not the cities, at least the countries in which corporate clients did business.
Firms began looking for partners whose physical presence and professional strengths were complementary, not overlapping.
In the latest deal, for example, KPMG brings a strong practice in state and federal government-related issues, whereas E&Y has a strong list of energy and real estate clients.
That’s not to say the latest merger isn’t likely to have its rough spots. In a touch of irony, the merger will trigger Round 2 of the Accounting Cola Wars: E&Y has Coca-Cola as a client, whereas KPMG has Pepsico. When E&Y was created in 1989 through the merger of Ernst & Whinney and Arthur Young, the former had Pepsi as a client, the latter had Coke.
While ethics rules prohibit sharing client information with other clients, Coke was adamant back then: It’s us or Pepsi. The merged firm chose Coke, and Pepsi went to KPMG, then called Peat Marwick.
“This one will probably pop up again,” Bowman noted.
So will it stop with the Big Four?
“I’ve trademarked a new phrase,” Bowman laughed. “Whoever’s left will be called the Big One.”
