INTERNATIONAL NETWORKS are the light warming the faces of second-tier firms struggling in Big Four-dominated markets. Major mid-level players are scrabbling shoulder-to-shoulder to snatch a piece of emerging markets, the fastest way to do which is through absorbing domestically owned firms into global networks.
Recently, those nipping at the heels of the Big Four abroad have seen their larger peers swoop to cherry-pick firms from their networks; Grant Thornton has shed two in the last year of which one, in Brazil, was swiftly followed by BDO losing a Brazilian member to KPMG.
It seems that the Big Four are interested in rapidly growing firms that occupy the fifth or sixth spot in their respective markets, the closest competitor to the top dogs in effect. In their darkest hours, second-tier firms must wonder if this is a deliberate ploy to undermine their international efforts and sew up markets the world over.
Unsurprisingly, the Big Four are not’t keen to discuss the issue. Their smaller competitors are jumping up and down, demanding that something be done, yet global competition regulation is a tricky and largely uncharted ocean in which firms are left to sink or swim alone.
In August last year, Grant Thornton was left standing on the sidelines as Terco skipped off to join Ernst & Young Brazil. Grant Thornton International’s chief executive, Ed Nusbaum, called the deal “regrettable”, saying: “Strong brands are always subject to the interests of others; we are no exception to this rule and have to accept it as a mark of our success at building a differentiated and strong organisation.”
Last month, the firm’s Danish partner, Erik Stener Jørgensen, cosied up to PwC, claiming its network-hopping behaviour would “further improve [its] capabilities to serve [its] clients internationally”. And earlier this year, BDO’s Brazilian member firm hauled anchor and sculled off to join KPMG, on which CEO Jeremy Newman said: “BDO is not the first firm to have suffered as a result of our larger competitors using their dominant financial positions to buy market share. These tactics are not driven by client needs but by one firm’s wish to buy market share and presumably achieve further economies of scale.”
Specks on the horizon
It must be galling indeed to select, court and invest in global members, only to see them gallop off into the sunset when the Big Four come a-knocking. Mid-tier spokespeople unanimously agree that this is an accepted risk of international expansion, and one that does not alter their network-building tactics.
However, they are keen to discuss ways of curbing what they see as anti-competitive behaviour on the part of the Big Four. Richard Bint, senior partner at PKF, revealed the firm is enjoying organic growth of 20% per year in emerging markets, rising to 24% in India. Grant Thornton’s Steve Maslin said the firm plans to double its global revenue in the next five years, driven strongly by work in booming economies. On this basis, it is likely that the top-10 firms will be desperate to prevent an elbow in the ribs from a dominant Big Four.
Little in the way of competition regulation exists on a global scale. There have been rumblings from the World Trade Organisation about establishing an oversight body, though so far the debate has not transcended the conference hall.
National regulators have roughly similar competition regimes with some, such as the US, more business-friendly than others, according to competition expert Fergus Randolph QC.
These domestically-focused bodies will not consider the international picture unless it is brought to their attention; this falls to individual firms because regulators are reluctant to intervene abroad. Randolph likened the cross-border involvement of regulators to “a game of Chinese Whispers”, saying it would be more effective for firms to make their case directly.
Regulators look first at the domestic picture: will a merger improve service or price in a market; will it undermine local competitors? In developing economies, it is entirely possible that the arrival or expansion of the Big Four would drive down prices and boost quality; it would certainly give clients access to international services.
On this basis, ‘wronged’ complainants such as Grant Thornton or BDO would have to make a compelling argument that, in the long term, such a deal would be detrimental and its effects visited upon domestic interests.
Nevertheless, firms have been vocal in their displeasure, with BDO planning to lodge a complaint about the Brazilian deal and Grant Thornton raising its concerns at the European Commission over the loss of its Danish member.
Arguably, this Danish deal could have been a test case. If it was then mid-tier firms might have reason to fear for the future of their star network players.
The European Union is one of the few examples of supranational competition law; it has stringent rules guarding against the abuse of dominant positions, an accusation that has been thrown at the Big Four more than once.
Mergers are linked to the issue of dominance and are only permitted where the European Commission finds there is no significant impact on competition. Even if national regulators approve a deal, EC objections can still override it, potentially forcing a divestment of recently acquired assets or other parts of a company.
This rarely exercised power gives the EC credence in cases where it does intervene. If an inquiry is carried out and the Commission finds that a merger poses no problem, interested parties are invited to comment; second-tier firms then have their chance to complain, though the consideration they are afforded in the wake of a no-fear finding is debatable.
When questioned on the possibility of further Big Four cuckolding, mid-tier firms professed to be unconcerned. James Roberts, director of risk at BDO, said firms go through an enormous amount of due diligence when welcoming a new member, ensuring they are a good fit and share the network’s aims and beliefs.
He is echoed by peers who sais there is little point in levying a financial disincentive to prevent members jumping ship because the Big Four can trump any figure. Instead, network builders concentrate on absorbing firms that are eager to join, with which they can establish a balanced and dependable relationship.
Ultimately, networks have to trust a heady mix of diligence, investment and faith when hoping that their members won’t fly the nest. There is little prospect of international regulation on the horizon and European bodies seem open to the prospect of Big Four acquisitions for the time being, although market commissioner Michel Barnier’s green paper could soon change that.
Mazars partner David Herbinet paints an even gloomier picture for second-tier firms: “It is interesting that, despite the ongoing investigations by the EC and the Office of Fair Trading, the Big Four firms continue to do as they please. If they were really worried, I would expect them to stay under the radar.”
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