Finance: Bean-counters take over

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The Independent Online
Set against the billions of pounds in corporate transactions exciting stock markets around the world, the takeover of Newsquest, the UK regional newspaper publisher, by Gannett, the company responsible for USA Today and other titles, hardly merits a mention.

But the pounds 920m deal in the summer has huge significance for the large accountancy firms. PricewaterhouseCoopers, the corporate finance adviser, not only notched up the largest public deal by a member of the Big Five, it also showed bean-counters could take on the investment banks advising on $1bn-plus mergers and acquisitions.

And this transaction was not a one-off. There has been a host of deals worth more than pounds 100m led by accountants. These include the US marketing group Interpublic's pounds 120m takeover of Brands Hatch and Slough Estates' near-pounds 300m acquisition of Bilton, a deal in which PwC became the first accountancy firm to take the lead advising role in a hostile bid.

The significance of this trend should not be overstated. PwC has been involved in about pounds 4bn-worth of public takeover deals in the past year, and the figure for the investment bank Goldman Sachs would be more like a trillion pounds. Similarly, PwC only has about 25 of a total corporate finance staff of 220 in this area.

But the growing importance of corporate finance to the biggest accounting firms has been apparent in the revenue figures in recent weeks. For example, Deloitte & Touche reported at the end of last month that corporate finance had a 31 per cent rise in fees; at Ernst & Young it was 22 per cent.

A Deloitte spokesman made clear this is partly a reflection of a buoyant corporate market. "There's enormous corporate activity," he says. "We grew 21 per cent because our clients were very busy," he said.

But there is more to it than that. Some of Deloitte's rivals have been making a concerted effort to break out of the market for management buyouts and other private equity deals, where accountancy firms have long been picking up fees regarded as uneconomic by the large investment banks.

They see it as a logical part of their search for "value-added" work to complement the less-glamorous and less-profitable audit business as well as another aspect of their attempt to provide a one-stop shop for professional services.

David Rothnie, editor of Acquisitions Monthly magazine, says no one expects firms such as PwC and KPMG to threaten the very largest US and European banks, but they have "moved higher up the chain" and contributed to the problems confronting smaller banks. Some of these have been taken over, and others have pulled out of corporate finance to concentrate on broking.

One key area in which the large accounting firms have been competing with banks is in staff. Once, the fashion was for smart accountants to train with a big firm, then head to the Square Mile for more interesting and lucrative work. Now, there is significant traffic in the opposite direction.

Philip Kendall, head of PwC's plc advisory service, is one of many ex- bankers leading the charge of the accountants. He agrees with Mr Rothnie that the so-called mid-market merchant banks have become vulnerable, and he believes many corporate finance specialists are being drawn to the opportunity of building a business with a large accountancy firm instead of sticking around and trying to defend an increasingly perilous position with an established player.

He also pours scorn on the frequently-voiced view that, first, accountants are picking up all this work only because there is so much activity and that, come the next recession, the investment banks will reclaim what is rightfully theirs; and, second, that the potential of accountancy firms in this arena is limited by their inability to underwrite deals.

On the first point, he claims the accountants have become well-enough entrenched for it to be "a bit difficult for the big guys to get back". The second, he says, is based on a misconception. In fact, few deals require an underwriting ability. And an accountancy firm can cover that aspect by agreeing to be a joint lead adviser with an investment bank.

Of rather greater significance is the partnership structure of the accounting firms. For all their insistence that they are global organisations, many of the big firms remaincollections of national partnerships. This means they can have difficulty allocating profits (and costs) when deals involve input from people in several countries, as is frequently the case.

Mr Rothnie says the issue threatens to be "a major stumbling block" in attempts by UK firms to export their newly-won expertise to various parts of continental Europe. But he points to moves by Arthur Andersen as a way ahead.

Put simply, the firm has tried to "move internal barriers" by making a special case of its corporate finance practice. Over a year or so it has been shifting to a position to bind its 500 to 600 corporate financiers around the world into a single team rather than various national units. These "deal creators" are being encouraged to shadow the firm's industry specialists to try and spot opportunities.

"It's a question of how you motivate people," says Martin Thorpe, managing partner for global corporate finance at Arthur Andersen. He reckons that, by creating a single profit pool and a single resource pool, corporate finance specialists in different parts of the world will be more inclined to co-operate with each other.

Of course, what that means for people in other parts of the firm who might bring some expertise to bear on these deals is another matter.

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