Finance: So who will pay for the mergers?

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The Independent Culture
When big firms merge, sooner or later the questions have to be raised: how much will this cost? And how will it affect partners' benefits?

Roger Trapp reports on the bottom line.

It all started grandly and loftily enough. When Coopers & Lybrand and Price Waterhouse announced their plans to merge back in September, the talk was all of "globalisation" and "brand leverage". By the time, a few weeks later, that KPMG and Ernst & Young had swapped their initial scorn for what looks a lot like envy and had thrown their hats into the ring, the issue was funding information technology investment.

Since they involve accountancy firms, we really should not have been surprised that money should have reared its head in this way. Even so, there were a few raised eyebrows last week, when Nick Land, senior partner of Ernst & Young, said the proposed merged firm would be needing upwards of half a billion dollars a year to spend on upgrading IT systems and running overseas operations. The decision to pool forces was prompted by the desire to raise those sort of sums quickly, he added, pointing out that, as partnerships, even large accountancy firms did not have the same sort of access to capital as their clients.

So much for the overall good of the firm. But then Mr Land - who is not one to beat about the bush - spelt out what a joining of forces meant for partners in the two firms. Prefacing his remarks with a statement of partners' belief in the long term, he said that the costs of the last merger - which created Ernst & Young out of Ernst and Whinney and Arthur Young - had reduced income and pension contributions, hitting some older partners particularly hard. A similar experience could be expected this time around.

This is not good news for a bunch of folks who, though their latest earnings show a substantial rise from a year ago - average profits per partner were up from pounds 200,000 to pounds 259,000 - saw a dip in earnings between 1994 and 1995.

Nor, starkly honest as it may be, is such a statement being greeted with delight by the other merger camp. Already seemingly convinced that the KPMG/E&Y link-up is an elaborate spoiler for their plans, some are voicing fears that this could prove alarming to their partners.

Indeed, it could just provide the push that many partners and others need for leaving. Mr Land used last week's announcement of E&Y's buoyant results to say that - even if either or both of the planned mergers were blocked - the Big Six would not remain the same. He predicted the appearance of various alliances, joint ventures and experiments, and aired the possibility of certain offices or partners setting up on their own or joining with different firms rather than taking part.

He said that Arthur Andersen, the firm that would be outgunned by the merged entities, and Deloitte & Touche could be expected to seek to "peel away" certain parts of the business.

But he need not have stopped there. Despite consistent talk of further consolidation in their part of the market, the second-tier firms are behaving remarkably confidently.

BDO Stoy Hayward, ranked eighth in the UK (though its management insists it does not "like to talk about size"), recently placed an advertisement in Accountancy Age magazine urging partners with the firms involved to consider joining it.

Adrian Martin, the firm's managing partner, explained that it was intended to be "a marker" and platform for its headhunters. He claimed to be already receiving interest from personnel who did not see their future in organisations like those being contemplated. Indeed, partners recruited from top firms in the past had commented on the pressure to achieve high margins even though the sort of work they did would not support them, he said.

Mr Martin - who had a famous run-in with PW over his claims (contested by PW) that it had picked up the RAC, a former Stoy audit client, through "lowballing" - emphasised that he hoped both mergers were cleared by the regulators because of the opportunities that would be created for firms such as his own. "They will have different IT platforms, different approaches to professional work. It will be chaos," he said.

He stressed that his firm did not harbour global ambitions; having sold off the management consultancy arm it was not doing any more government work, and was now focusing on the needs of growing businesses. But he saw great "opportunities to pick up key people and clients".

It is a view also canvassed by Kidsons Impey, another top 10 firm. It, too, is confident of being able to appeal to the many owner-managed businesses that were taken on as clients by Big Six firms in the wake of the early Nineties downturn, but will now be worrying where they fit into more globally- oriented organisations. "These mergers can be seen as a clear message from the Giant Four that the owner-managed business sector will no longer play an important part in their long-term strategic planning," said Peter Douglas, a managing partner.

But, of course, merger between accounting firms is not the only game in town. Though the much-rumoured link-up between Arthur Andersen and the leading City law firm Simmons & Simmons is not now likely to happen, Andersen has let it be known that it is still looking for the right big- name partner, while Simmons & Simmons is prepared to entertain enquiries.

It is generally recognised that some day - perhaps when the economy takes a turn for the worse - a law firm will submit to accountants' overtures. But there again, there are enough people holding out against multi-disciplinary partnerships. And, surprise, surprise, Stoy has taken out an advertisement in the latest issue of The Lawyer, positioning itself as an "independent".

The battle is clearly on between those who see themselves as protectors of the traditional partnership ethos, and those they perceive to be more like the corporations they represent.