Accountancy: Newcomers enter the lists: Solicitors, accountants and banks are making a play for corporate finance work. Roger Trapp reports

Click to follow
The Independent Online
RECENT years have seen a blurring of the boundaries of many of the professions. Accountants are as involved in the intricacies of tax law as solicitors. Lawyers are increasingly setting themselves up as insolvency practitioners. And both accountants and lawyers are making a great play for the corporate finance work that was formerly the preserve of merchant banks.

This last development is likely to receive a significant boost from the changes to the Stock Exchange's new listing rules - the Yellow Book - which took effect at the beginning of this month.

Previously, only the 54 members of the exchange could act as sponsors for companies seeking a listing for the first time, or seeking to carry out certain other transactions. But now - after pressure from the Law Society and the Institute of Chartered Accountants in England and Wales - 38 more firms of solicitors, accountants, banks and other financial advisers will be able to carry out the role.

Accountancy firms, with fee income in such traditional areas as audit under pressure, are particularly keen to move in on this territory. Indeed, many of the big six practices have already made significant progress in management buyout work, where the sums involved are not considered large enough to interest merchant banks. And once they proved their abilities there, it was not such a big leap to share placings.

In the US, accountants are well used to the role. Kevin Maguire, a partner in the Chicago office of Price Waterhouse, has personally been involved in six initial public offerings, while his group has worked on twice as many. He sees it as a natural extension of the firm's tax and audit work for middlemarket companies that are seeking to grow.

'It's tough for the traditional financial institutions to get comfortable with small companies because of the risk,' he said. In addition, firms like his own were better able to service the sector because of their fee structure. While investment banks based their fee on the size of the transaction, accountants based theirs on the number of hours they work on the deal.

But this is not to say that an accountancy firm will act for any company that an investment or merchant bank turns down. Start- ups are notoriously unpredictable. And while a firm such as PW will often make an investment by discounting its fees at the front end of a deal, it also tries to be discriminating about whom it takes on. 'We can't make a living if we lose too often,' Mr Maguire said.

Risky or not, this may prove to be a market that the banks will be forced to find a way of getting into. Mr Maguire said that the number of IPOs with which his firm had been associated in recent months was a definite sign of the improvement in the economy. And in the UK, too, many of the signs of recovery are appearing among medium-sized companies - a market that even the biggest accountancy firms, not coincidentally, have been targeting lately.

Another advantage that some accountants are claiming over the banks relates to the spread of their networks.

Few expect, at least initially, to do much in the way of new issues from their London offices as there are plenty of banks well placed to carry out the work at similar cost.

Outside the capital, however, it is likely to be a different story. In areas where there is a dearth of merchant banks, an accountancy firm with connections to not just London but also many other countries is likely to prove an attractive alternative for the growing company looking to come to market.

But promising as the opportunity seems, most firms do not appear to rush in.

Touche Ross, for instance, has long boasted of its corporate finance expertise. In recent months, it has been lead adviser in the pounds 30m deal that took the Lotus sports car company from General Motors to Bugatti, as well as the pounds 200m management buyout at the car rental company EuroDollar and the pounds 31m buyout at Strathclyde Buses. But Lionel Young, the corporate finance partner with listing responsibilities, said it would be 'treading fairly carefully in the early stages'.

This is largely because even the most gung-ho can see potential conflicts of interest. The Chartered Accountants Joint Ethics Committee, which acts on behalf of the three chartered institutes in Britain and the Republic of Ireland, has already issued proposed guidance that must be commented on by interested parties by next week.

Jock Worsley, chairman of the ethics committee, said when the proposal was published last month that it was clear that the compliance role of sponsor to an issue was compatible with that of auditor. However, he added that it was 'vital that, if auditor, a firm should not be involved in the marketing or underwriting of an issue for which it is sponsor'.

The publication also proposed a clear distinction between the firms acting as sponsor and those marketing the issue, plus additional safeguards to ensure that a firm's objectivity was not compromised by the role of sponsor.

The difficulties are not lost on many of those who will be involved.

Richard Stone, head of corporate finance at Coopers & Lybrand, who last year was reprimanded by the Institute of Chartered Accountants over a conflict of interest arising from his acceptance of the Polly Peck administration appointment, has spoken of the dangers if large accountancy firms try to combine this new role with their existing work.

Meanwhile, Tom Wilson, senior corporate finance partner at Price Waterhouse in London, said the key was for the firm not to be prevented from doing its 'bread-and- butter' or regular audit and tax work.

Adding that PW was likely to be at the less aggressive end of the spectrum, he said he suspected that some firms would go a bit further than others.

This is a view that appears to be upheld by Mr Young when he says the conflicts are little different from those that already exist, such as between auditors and reporting accountants. While saying that his firm would be cautious initially, he added that he thought that most people would regard the Stock Exchange's decision to open its doors as a good opportunity.

'It's quite an exciting area,' he said, adding that his firm believed it could price the sponsor service 'fairly competitively'.

(Photograph omitted)

Comments