FDs slate merger plan

Finance directors this week attacked KPMG and Ernst & Young’s frantic scramble to merge, claiming it would restrict competition in the tightly-regulated audit market.

The two Big Sixers unveiled plans to create the world’s largest accountancy firm, with 12,800 partners and an income of $18.3bn. Their announcement comes after only two weeks of secret talks.

But both were accused of a knee-jerk reaction to the commercial threat posed by the Coopers & Lybrand and Price Waterhouse merger which was announced last month, rather than trying to meet the needs of their clients.

Brian Birkenhead, deputy chairman of the 100 Group of Finance Directors, said the reduction of the Big Six down to the Big Four was a grave concern to most of his member companies. He said: ‘There are two distinct views: one reflecting the small minority of top 100 companies which will be that increased global coverage is needed and would be an advantage. The other from the vast majority is that these mergers will lead to a dramatic diminution of competition.’

Birkenhead warned that international companies, which according to the Big Six firms would be the key beneficiaries of the mergers, would be those worst affected. ‘International companies will be tripping over conflicts of interest, especially over international transactions,’ he said.

Colin Masterson, director of financial control at KPMG-audited National Power, said the mergers were not about serving the needs of clients.

‘The PW/Coopers merger was all about being big in the US and the KPMG/E&Y one is a defensive move on the back of that,’ he said.

Masterson warned that companies such as National Power would be directly hampered by the mega mergers. ‘We are looking at a lot of global expansion where we are competing for projects and on each one of these, the competition has their own team of advisers,’ he said. ‘If there are fewer (Big Six firms), then which do you choose if they are conflicted-out. It’s a major problem.’

These comments were also echoed by a leading investment manager at a top pension fund, who asked not to be named. He condemned this latest merger plan as further ‘bad news’. He said: ‘The auditors’ strategy is spelt out quite clearly. It’s a case of “let’s cut out the competition with one-another and screw the client”.’

The dominance of the FTSE-100 audit market was already a cause of concern, and any merger would exacerbate the problem, he added.

The stranglehold the merged firms would have on the FTSE-100 market is revealed by the latest figures compiled by Accountancy Age’s sister title, Financial Director.

These show that KPMG and E&Y jointly have around 40% of the FTSE-100 clients, worth #88.6m. Coopers and PW have 45%, worth #88.3m. If the mergers succeed, the two merged audit giants would control 85% of the FTSE-100.

However, during a press conference on Monday, Colin Sharman, KPMG senior partner, said the firms had received mostly positive responses from clients.

He said: ‘Chairman and chief executives understand what we are doing and respect it, but finance directors, where they have expressed a view, have talked about lack of choice.’

Sharman also dismissed suggestions the merger was influenced by an attempt to scupper the PW/Coopers merger, which will have to be scrutinised by the European Commission and US anti-trust authorities. He said: ‘It (the merger) is clearly influenced by the timing of the announcement of Coopers and PW. But most of us have danced with each other in the recent past, so neither of us was unprepared for it.’

And, although Sharman acknowledged the threat posed to the mergers by the international regulators, he said they were not overwhelming obstacles compared to the firms’ need for global growth.

He said: ‘What scale does for us is to allow us to do more, more quickly.

We have a choice: we can sit back as little Englanders and say the problems of our domestic markets are so great that we won’t do it; or say that we will look at this from a global perspective and try our best to solve these problems.’

Sharman insisted the merger was driven by client demand. ‘Our clients want uniform quality services the world over. To provide that in new developing markets, in new technology and in new service lines is a phenomenal investment,’ he said. ‘And because we are all so similar, those of us that get a competitive advantage do so by doing things more quickly.’

This view was shared by Nick Land, E&Y senior partner. He said: ‘There will be a small number of conflicts. We don’t really know which ones at this stage, but the vast majority of clients, I am sure, will be pleased to see greater concentration of the centres of excellence in industries, skills and knowledge. All the historical proof shows that that’s the case.’

Under the deal, the London-based Sharman will takeover as the chairman of the international firm, and Mike Henning, the current chief executive officer of E&Y International in New York, will become the CEO of the new firm. The firm’s administrative office will be based in Amsterdam.

The roles of Nick Land, the current E&Y senior partner, and Mike Rake, KPMG’s chief operating officer, following the merger have yet to be decided.

Land said the plan was to roll out the merger agreement among the two firms’ worldwide partners as soon as possible. ‘I am sure that partners agreements will be out of the way by the New Year,’ said Land, who added that the proposed merger had received massive support from E&Y’s UK partners at their general conference in Birmingham last week.

Nevertheless, he admitted that there would be ‘one or two parts of the world’ where the merger could run into difficulty. ‘I think these will be in some small countries where there are some small client conflicts, or particular regulatory aspects which have more to do with local politics than with anything else,’ said Land.

More stories page 4, FTSE-100 reaction page 7.