KMPG and Ernst call off $18bn accountancy mega-merger

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The Independent Online
Ernst & Young and KPMG dramatically called off their $18bn (pounds 11.25bn) accountancy mega-merger yesterday blaming "increasing difficulties" with the regulatory authorities. In a joint statement issued late yesterday afternoon, the two firms said the regulatory issues together with the costs and resources required to merge the cultures of the two firms "would have made the proposed merger impracticable".

The breakdown of the discussions casts doubt on the other proposed accountancy merger between Price Waterhouse and Coopers & Lybrand. However, the two sides said last night that they were still pressing ahead and were in talks with the regulators.

KPMG and Ernst & Young, whose merger would have created the world's largest professional service firm, said the regulatory process in US, Europe and other big markets would have taken too long, proved too disruptive and incurred considerable costs. It would also have created potential disruption to client service, they said.

Nick Land, Ernst & Young's UK senior partner, admitted that client opposition to the merger had also been a factor in the collapse of the deal. "The mood of opposition was initially confined to the UK. But it spread to other countries and I think that fuelled the regulatory concern."

The wave of mega-mergers had angered many finance directors who claimed the deals would have restricted their choice of auditors and led to higher charges. The four firms audit more than half of the 11,600 publicly quoted companies in the US and 88 of the UK's FTSE-100 companies.

John Worby, finance director of Unigate, the dairy group, said: "I didn't see what the benefits of the (KPMG-EY) merger would bring to UK corporates. I'm pleased to see it will no longer proceed."

Both sides attempted to put a brave face on the collapse of their plans which were announced last October. Colin Sharman, KPMG's international chairman, said that whilst he was "disappointed" he had no doubt that KPMG would emerge as "a stronger and more cohesive business." Nick Land said Ernst & Young looked forward to continued growth both in the UK and internationally."

Accountancy insiders expressed no surprise at the collapse of the deal. Many had seen the proposed nuptials as little more than spoiling tactics designed to de-rail the PW-Coopers deal which had been announced just three weeks before E&Y made its approach to KPMG. Critics had said that the KPMG-Ernst & Young plan was aimed at steering the rival merger into regulatory difficulties as the authorities were highly unlikely to allow four of the so-called "Big 6" accountancy firms to merge.

A spokeswoman for Coopers said yesterday: "We're not surprised at all by the failure of the merger, just the timing. We always saw the other merger as a hastily put together spoiling strategy. The two proposed mergers are very different. Together Ernst and KPMG have over 40 per cent of market share in seven European countries, whereas our merged firm wouldn't pass the threshold in any European country."

Peter Wyman, a senior partner on the Coopers board, said the failure of the other merger "has removed a big obstacle for us. People were worried about a move to four firms, but they won't worry about five." Privately, professionals at Coopers and PW were said to be "cock-a-hoop". One insider said: "You wouldn't believe the euphoria around here."

A spokesman for Deloitte & Touche said: "Deloitte Touche Tohmatsu has been opposed to consolidation among the Big Six because it is not in the interests of the profession and more importantly, because our clients have told us they are against it."

KPMG and Ernst & Young partners in America voted in favour of the merger before Christmas but partners in Europe were not due to vote until later this year. The combined firm would have had 1997 fees of $18bn and employed 163,000 staff worldwide. In the UK it would have had 1997 fees of pounds 1.2bn, 1,037 partners and 15,200 staff.

When the merger was announced in October the two firms had said it was a response to client demand for "global abilities and resources". They said at the time that they anticipated that they would be able to satisfy the competition authorities.

But yesterday they said the investigation in the US, Europe, Australia, Switzerland, Canada and Japan would have taken "many months".