Is there safety in numbers?

IF THERE is one thing the accountancy profession is agreed on, it is that medium-sized firms face a tricky future. Caught between the overwhelming power of the Big Five international firms and the small niche practices, they are busy jostling for position just to survive.

Senior partners of most of the firms operating in the "second tier" make confident noises about their prospects, but few expect the landscape to remain the same. A wave of mergers is widely predicted.

So far, BDO Stoy Hayward merged with Moores Rowland, and rival operators Robson Rhodes and Pannell Kerr Forster called off a merger after they discovered they were not as well suited as they had thought. Moores Rowland had been in talks with Kidsons Impey before Stoy Hayward made its move.

But the recent acquisition of the specialist insolvency practice Buchler Phillips by Kroll Associates, the international firm of business investigators, has alerted partners in some medium-sized firms to an alternative to merging with each other as a way out of trouble.

Suddenly, the prospect of being bought out by a large corporation leaves some accountants rubbing their hands in anticipation of the arrival of what have become known as "the consolidators".

The excitement is based on the notion that in accountancy, as with many other things, what starts in the United States will sooner or later find its way across the Atlantic. Already, American Express, H&R Block and Century Business Services have bought many regional accounting firms. In three years, American Express has accelerated a process of expanding into accountancy and tax advice which started nine years ago by purchase of large firms in the Chicago and New York City areas.

H&R Block, largely known for its tax form services operations in the US, Canada, Australia and the UK, has acquired eight firms since it began developing a national network of accounting, tax and consulting practices in May 1998. The most significant deal came just a month ago when it bought the United States' eighth largest firm, McGladrey & Pullen, for $290m.

H&R Block said Minneapolis-based McGladrey's size and industry leadership would provide a strong platform on which to build a leading national practice focused on the needs of the fast-growing middle-market clients.

Richard D'Ambrosio,spokesman for the American Express tax and business services division, said his company was "very focused" on the small- and medium-sized business market and its national brand and ability to offer a national standard of service would help the accounting firms it acquired deliver better products and services for their clients.

H&R Block, attracted by the introduction of self-assessment in personal taxation, has already moved into the UK. But American Express will not be drawn on whether it has plans to expand into the British accounting field, suggesting it is too busy digesting the US businesses to take on more. Not that this is putting accountants off using their counting skills to speculate on the size of any pay-off they might get should such a move materialise. "It looks like a great way to retire," said one.

But others are not sure the picture will be so rosy. It is not unknown for consolidators to reward certain partners in the firms they acquire handsomely and return the others to the unfamiliar fold of ordinary employees. More pertinently, Adrian Martin, managing partner of BDO Stoy Hayward, suggests that even allowing for the inevitable effects of swapping a private partnership for a corporation many people may be building up false hopes. "There's a lot of noise, but I wouldn't be surprised if it didn't come to anything," he says.

But, while some of those firms most looking forward to the arrival of the cash-rich Americans are likely to be insufficiently profitable to be attractive to them, it is not impossible that companies with special expertise in such areas as serving wealthy individuals could be picked off. For those medium-sized operations who do not find their escape this way, there are testing challenges.

Some practices put great faith in the international associations that have sprung up as a sort of attempt to follow the approach of the biggest international firms. For example, Neville Russell and Mazurs formed an international alliance to become sixth biggest fee-earner in France, seventh largest in Italy and Spain and the 12th biggest in the UK.

With even the biggest firms only just getting their international networks on to a really formal footing, medium-sized firms risk their credibility if they become too closely involved with firms that do not share their standards.

With so many international links around, they need to come up with compelling reasons for clients to choose them over the opposition.

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