Grey suits, sexy deals

Accountancy firms are chasing mergers work to boost revenues, says Stephanie Baker-Said
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The Independent Online
When Slough Estates made a hostile bid for rival UK property company, Bilton, last year, it did not rely for advice on its investment bank, Warburg Dillon Read. It used its auditor, PricewaterhouseCoopers (PwC).

PwC, the world's largest accounting firm, proposed the pounds 277m takeover and helped it through to completion. It was not a first - far from it. Like the other "Big Five" audit firms, PwC is seeking to boost flagging accounting revenue by chasing the mergers business of mid-sized European investment banks, such as Dresdner Bank's Dresdner Kleinwort Benson unit, Robert Fleming & Co, and Schroders.

This strategy has worked better in Europe so far than in the US, where regulators' concerns about conflicts of interest stop accounting firms from providing certain types of merger advice to their audit clients.

The corporate finance arms of PwC, along with those of KPMG, Deloitte & Touche, Ernst & Young and Arthur Andersen, are expanding their merger advisory businesses by poaching bankers from JP Morgan & Co, Schroders, Bankers Trust and Warburg. They then target companies - often audit clients - involved in transactions of US$500m (pounds 320.51m) or less. These deals are usually too small for big banks like Goldman Sachs and Merrill Lynch.

"Investment banks have withdrawn from the middle market," said David Beever, chairman of KPMG corporate finance and a former Warburg managing director. "It's left us with a huge opportunity."

While audit firms do not rank among the 10 biggest merger advisers in terms of the value of transactions completed - to-gether they advised on only $32.8bn, or 5.8 per cent of Europe's mergers market last year - by sheer number of transactions they sit on top.

Last year, KPMG Corporate Finance completed 430 merger and acquisition transactions worldwide, more than any other adviser, according to IFR/Securities Data Corp. PwC ranked second, working on 429 transactions, followed by Morgan Stanley Dean Witter & Co.

Ernst & Young ranked 13th in number of completed deals, with 188; Arthur Andersen came in 26th and Deloitte & Touche finished 28th.

Big Five firms are starting to grab larger transactions. In June PwC advised Gannett, the top US newspaper publisher, on its $1.68bn acquisition of the UK publisher, Newsquest. It is the biggest deal ever handled by one of the Big Five.

Investment bankers say they do not bother with smaller deals because there are plenty of big transactions with much larger fees. PwC, for example, was paid $4.6m for advising Slough on its two-month battle for Bilton. In contrast, the four banks working on Olivetti's $33bn four- month bid for Telecom Italia earned $70m each - 15 times as much.

Accounting firms, which began by providing corporate finance advice on private transactions, started to target public companies about five years ago. Still, accountants do not compete directly with investment bankers because audit firms lack the ability to underwrite stock and bond sales needed to finance the biggest transactions.

However, they are able to compete for people, especially in Europe. In February, Graeme Griffiths, a former senior banker at JP Morgan in Asia, joined KMPG Corporate Finance in London to run a new group focused on international mergers and acquisitions within Europe. That month, Richard Lazarus, previously head of UK corporate finance at Schroders, joined PwC as a partner in its London-based public company corporate finance team.

"You don't get the bonuses as with the investment banks, but the culture, the hours, the lifestyle is better," said Tony Tucker, the director of Shepherd Little & Associates, a London-based recruiter.

Colin Gillespie, PwC's Manchester-based corporate finance head for northern England, is a case in point. He left BZW last year after it was bought by Credit Suisse First Boston in 1997. He resisted CSFB's requests for him to move to London, and so he took a job with PwC, which lets him stay closer to home as well as work on UK companies.

"Partners share in the profits of the overall firm, including accounting and consulting," said Philip Kendall, PwC's head of public company corporate finance who left Samuel Montagu & Co in 1996. "Our revenue base is less volatile."

The average salary and bonus of a European bank director was about pounds 300,000, which was comparable to what a partner at one of the accounting firms would earn, said Steve Fordham of Morgan Hunt, a London-based recruiter.

Still, the prestige of working at a top-rated investment bank, coupled with the larger bonuses tied to advising on big transactions, enabled firms to keep the best and the brightest, Mr Fordham explained.

"The accountancy firms are not getting people from Goldman and Morgan Stanley," he added.

"It's mostly European firms who are perhaps losing direction."

Additional reporting: Agnese Smith and Courtney Schlisserman for Bloomberg News

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