Finance: Is there more strength in numbers?

Middle-ranking accountancy firms are teaming up to survive.

THIS WEEK'S announcement that Pannell Kerr Forster and Robson Rhodes intend to merge on 1 May is the latest in a series of moves that are producing a fundamental shake-up in the so-called second-tier accountancy firms.

Pannell Robson, as the new firm will be known, will have fees of more than pounds 120m and employ more than 2,100 partners and staff in the UK. According to Martin Goodchild, the PKF managing partner who will take on the same role in the merged firm, the deal is "a significant step in our strategy to develop a business advisory firm with a strong national presence and far-reaching international connections."

Both firms make the usual comments about shared visions and clear business strategies. But it can be argued that this is a deal created by increasing pressure. The part of the accounting market just below what is now the Big Five has long been seen as highly competitive. On the one hand, few large corporates now use such firms for their audit work and, on the other, all sorts of firms are presenting themselves as specialists at serving the obvious alternative - growing businesses. Moreover, such firms are vulnerable to the activities of specialist niche players.

Both PKF and Robson Rhodes must have felt this pressure especially keenly since, in the past two years - a period of growth for many professional firms - their revenues had been almost flat, at about pounds 75m and pounds 43m respectively. However, Mr Goodchild insisted that both firms were moving from a position of strength. PKF, he said, had sought to improve profitability rather than increase volume. In the interests of raising partners' earnings it had pulled out of certain operations.

This is seen as important because partners in second-tier firms have tended to be vulnerable to approaches from the biggest practices if their earnings levels drop. With the Big Five firms prospering of late, they have been especially keen to hire extra staff - and to pay them highly competitive salaries.

Pointing out that the move will not shift Pannell above its eighth slot, Mr Goodchild added that the merger was not an attempt to get bigger just for size's sake. However, he stressed that the deal "clearly distances us" from the group of firms below - giving it the scale and resources to develop services to meet the needs of UK and international clients.

Mergers are a constant topic of conversation whenever accounting folk meet. Indeed, a report from the Institute of Chartered Accountants in England and Wales predicted that, by early next century, there would be a Big Four at the top of the profession followed by three middle-tier firms. With any further consolidation at the top thought to be ruled out for the moment by regulatory concerns, attention has shifted to the next level - especially because of the perceived competition in the sector.

Though there had been moves last year, the pace really started to hot up in January, when BDO Stoy Hayward and Moores Rowland announced they were joining up to create the UK's sixth largest firm. There is, however, a little controversy around this claim, since many of Stoy's rivals argue that it is a collection of firms rather than a single organisation.

Both Adrian Martin, managing partner of Stoy's, and Clive Weeks, his opposite number at Moores, had - like their opposite numbers at PKF and Robson Rhodes - been at pains to play down the size claim. Instead they justified the link-up to create a firm with annual revenues of about pounds 150m as enabling them to offer a better service to their growing number business clients.

David McDonnell, managing partner of Grant Thornton, the enlarged Stoy's closest rival, with fees of about pounds 145m, says he will not be drawn into making a deal just to move up the pecking order. But even before the deal to create Pannell Robson was announced he saw signs of a merger trend continuing.

At the end of last month, for instance, Smith & Williamson, the twelfth largest firm and a specialist in advising small companies and private clients, linked up with a small north London practice called Hereward Philips with the aim of expanding its network of offices.

As Mr McDonnell points out, there is also the European dimension developing. Last month Robson Rhodes announced a Brussels-based joint venture with firms from France, Spain and Germany. The practices - like Stoy's and Smith & Williamson - are already members of global organisations and have taken a stand to meet the needs raised by the introduction of the euro. And it will not all be good news. At this stage, it cannot even be certain that the Pannell Robson union will be consummated as planned on 1 May.

Moores Rowland, for example, had been in aborted talks with Kidsons Impey before announcing the Stoy's link-up. Equally, there will be others that are essentially defensive in nature - largely designed to prop up finances that have failed to recover from the recession of the early 1990s. But with many medium-sized companies likely to feel that the largest firms are no longer meeting their needs, and the entrepreneurial-type business increasingly buoyant, there are rich prizes for firms that can convince clients they are both properly focused on their interests and sufficiently well connected around the world to help them expand.