Leader: Why Connolly's new venture is unlikely to chase Big Four; or follow failed consolidator model

CAN THE DEMONSTRATIVE former Deloitte head John Connolly lead newly-formed CogitalGroup up against the Big Four?

Can he succeed in building an accounting firm via consolidation, where so many others have failed?

These may seem the most pertinent questions that need an answer, when it comes to the surprise formation of an accounting/advisory group backed by mega-private equity in HgCapital this week (and chaired by Connolly).

However, I think there are others to consider…

Let’s deal with these two first, though. For Cogital Group to put itself up against the Big Four, it’s only realistic option is to buy into an established network of firms across the globe.

The UK business acquired by HgCapital: the slightly less demonstrative practice Blick Rothenberg, is a member of the BKR international network, boasting 112 firms across 154 countries. However, these firms operate with separate branding and don’t appear to have the same stamp as a PwC or KPMG network member. In other words, being part of the network doesn’t give Cogital a passport to brand itself as a global player.

On the thorny topic of taking a ‘consolidator’ approach, there are key reasons why I can’t see Cogital wanting to following that well-trodden and doom-laden path, despite HgCapital’s previous interest in RSM Tenon.

The other two UK firms that went down that route all failed: Numerica and Vantis. There a number of reasons why the three collapsed, including:

• Overpaying – The firms tended to overpay for their acquisitions, draining their future cashflow;

• Over-expansion – They stretched themselves too thin, and struggled to incorporate new offices into the fold. Subsequently any value to be derived from economies of scale failed to be achieved; and

• Listing – The consolidators were listed on the markets. This meant they had to wash their dirty linen in public, creating image problems. It put them under pressure to continue to report growth on a quarterly basis, putting them in a cycle that saw them continue to over-promise. Another fundamental problem with this model was that it created another layer of shareholders, influencing the direction of the firm and wanting a return on their investment – exactly what the firms’ directors (AKA partners), were also trying to achieve.

HGCapital’s intentions…

But I am not so sure that HgCapital has aims for Cogital to be either a consolidator in the same sense as the previous failures, or to take on the Big Four in its most grandiose sense. Interesting to note that it sniffed around RSM Tenon not long before it collapsed.

For starters, HgCapital will be looking for a return on investment over a limited period. This is unknown, but PE tends to look at five-to-ten-year timescales. Ten years is not long enough to challenge the Big Four, unless they’re looking to do something dramatic – and the purchase of Blick Rothenberg isn’t dramatic enough for that to be their intention.

Secondly, this is clearly not a listed business, at this point in time anyway. They may well decide that Blick is quite enough, thanks, in the UK – while looking at strategic purchases in other major jurisdictions to build a small-but-perfectly-formed high-class consultancy.

Anyway, with Connolly and HgCapital keeping their cards close to their chest (besides a belated press release,) we’ll have to be a bit more patient to find out how they intend to “build a leading advisory services business”.

But being a Big Four rival? Possibly in terms of some clients yes, but sitting alongside them in the Accountancy Age Top 50+50? I don’t see it somehow.

Kevin Reed is head of editorial for Accountancy Age and Financial Director