KPMG and Ernst & Young in

Consolidation rolls on at the top of the consultancy industry: Ernst & Young and KPMG took less than three weeks to announce their own merger after Coopers & Lybrand and Price Waterhouse said they would join forces.

According to Colin Sharman, chairman of KPMG International, the merger talks began in earnest after the PW and C&L announcement at the beginning of the month. When the two Big Six players created a monster-sized practice, he said, “we had to react to it”.

Sharman, who is chairman-designate of the merged firm, believes this is only the start of a wave of consolidation:

“Real competition is increasing in the consulting market, and we will see more firms consolidate. A lot of niche players will move up into our places.”

Sharman said that KPMG and Ernst & Young “have often been head to head”, and the best thing for the firm was to merge with with one of its strongest rivals.

Nick Land, senior partner at Ernst & Young, commented: “KPMG had been our toughest competitor and is a natural choice.”

Both firms cite global competition and the growing pressure to provide services worldwide to clients at competitive rates, as factors driving firms of their size to merge.

“If the client is in a tent in Kazakhstan, you have to be in the tent next door,” said Land, who will be driving the change programme together with Ernst & Young’s chief operating officer Mike Rake.

“First, we want to be global players and second, the name of the game is investment, and this will give us competitive advantage in time-to-market,” Land said. “We are seeing more and more consolidation going on in industry.”

If Ernst & Young and KPMG merge, their combined worldwide revenue will come to $18.3bn, of which consulting revenues represent US$3.8bn. The firms’ combined consulting revenue in the UK is £262.5m based on September 1996 figures. Combined UK consulting staff number 1,480 out of a worldwide complement of 21,420.

The two firms believe the merger will take out some of the duplication of costs of ventures in emerging markets.

Both firms have been investing in the region of US$100m a year in Russia and Eastern Europe, and expect demand and costs to rise in those sectors.

“The way in which you obtain competitive advantage is about investing more money more quickly to take you ahead,” Sharman said. “In China and Eastern Europe the demand for services will outstrip supply, and we are both desperately in need of resources.”

The merger will come under the scrutiny of regulators in the US, Europe and Japan, but Sharman says he is “reasonably confident that both mergers will get through”.

The two mergers will increase the likelihood that the Big Four will become more geared towards serving global multinational businesses. The market will open up for smaller practices to move up the chain and fill the gap.

“It is fairly clear that the larger firms are looking at their client lists and saying to them we do not think that we are right for each other,” said Peter Douglas, managing partner at Kidsons Impey.

“When life is competitive you don’t carry on with something you are not good at, what you do is get better in your own market.”

With mergers underway between four of the “Big Six”, attention has focused on Deloitte & Touche and Andersen Worldwide. Reports in the Wall Street Journal suggest that the two have had talks but that these have foundered over Andersen’s internal wrangles. However, both firms have now issued formal denials of an intention to merge.