The recently announced proposed merger of BDO and several large Moore Stephens offices is another step towards the further consolidation of the accounting sector. The rationale is to aggregate skill sets and clients, which by scale and service will attract new clients of a similar quality and specialist service requirement.
However, the market is becoming somewhat rarefied in terms of opportunities.
Below the Big Four and some distance away are Grant Thornton, BDO and RSM, in the £300m-£500m range.
Although there is an emphasis from regulators and politicians on building practices which can perhaps compete with the Big Four, this is an unlikely scenario as even the next four in the list would together only achieve combined fee levels just short of KPMG’s.
And why would those firms look to ape the Big Four anyway? That the top listed company audits would be attractive for a new entrant into the market is a questionable idea.
Auditing and regulation of the top commercial entities has a premium cost attached to it. A potential entrant, Grant Thornton, has already said it’s not interested in these audits.
Where will the next deal come from?
However, the old idea that ranking by fee turnover is important could mean that Grant Thornton would need another acquisition to again move clear of BDO.
What are the opportunities for them, or other practices to grow through acquisition?
Many next tier targets appear to be unlikely ‘full’ merger candidates, due to them having a mixture of ownership structure, or characteristics that would make them difficult to bring on board. Smith & Williamson for example, works under a range of regulatory regimes due to its wealth management/banking arm.
However, deals such as BDO’s with the Moore Stephens offices do create ripples. For example, what is the next move for the still-branded Moore Stephens offices – those that haven’t merged into BDO? And will the Moore Stephens international network MSI look to fill the gap made by those offices that have left? The attractiveness is the central London presence, which is now vacant.
Mergers impact international networks
Mergers can break down networks. They, and alliances, are predominantly non-equity and as a consequence have to be very fluid and perform a service to assist in providing a standardised global servicing for international clients. However, when someone is picked out for an acquisition or merger and the brand changes, that alliance and group is steered to replace in that location with a similar or second tier firm. That was certainly the case with Baker Tilly in the UK when it joined the RSM network.
Private equity enters the market
Baldwins, the Midlands-originated accounting practice, now backed by private equity, has made a number of acquisitions in the UK. Its fee base is likely to be measured in hundreds of millions of pounds, rather than tens. It retains acquired offices, providing local servicing of clients.
Private equity has not significantly attacked larger accounting firms, with the exception perhaps of the HG Capital’s investment into Baldwins and the subsequent Wilkins Kennedy acquisition. But there have been serious inroads into certain service sectors by other private equity firms both in the UK and elsewhere. These have usually been into specialist service areas where scalability has driven growth and growth trends have been well above the normal general practice growth trends which we have seen historically. Those initiatives have not yet been fully reflected in the European marketplace, but we have seen the first signs of interest.
Client quality and profits must rule
As regards future consolidation, if there is upward consolidation in the Top 15 then it will have to be based on quality of clients, justifiable increases in profitability for the ongoing partners and unfortunately rationalisation of staff and a realignment of members, associates and networks. This is not always bad, and some networks have been reinvigorated through new lead members in various countries.
Consolidation will continue, but the strategy needs to be clearly formulated and attaining fees merely for size – or a ranking in a table – is unlikely to deliver the greatest profits or enhance services.
Keith Underwood is MD of M&A and advisory consultancy Foulger Underwood