Merger Collapse: The Aftermath – Standing together

When they heard the merger of KPMG and Ernst & Young had been calleder between Ernst & Young and KPMG could be described as ‘jubilant’, writes Jonah Bloom. off, it seems the spin-masters at Coopers & Lybrand and Price Waterhouse went to the thesaurus and looked up ‘happiness’. Depending on your choice of reading material, they were either ‘jubilant’, ‘jumping for joy’, or simply ‘celebrating’. But the collapse of the one merger does highlight the problems faced by Coopers and PW.

What became increasingly clear in the days after the merger was called off was the lack of genuine unity of purpose across the two firms. While management at Ernst & Young admitted to Accountancy Age they had made the ‘entirely amicable’ decision to call off the merger, their counterparts at KPMG confessed to being a little disappointed that they had been jilted at the altar.

While KPMG chief operating officer Mike Rake portrayed a bright future for the non-merged firm, disgruntled KPMG partners questioned whether the present management should continue to lead the firm in the aftermath of the collapse, revealing they had become increasingly worried about the proposed marriage over the last few weeks. European partners were said to be concerned the merger was being driven by US partners and was for their benefit. Such fears are consistent with Rake’s assertion that KPMG’s US firm was particularly upset by the collapse.

And the staff on the ground floor? Well, those who spoke to Accountancy Age were uninterested to the point of nonchalance. ‘To be honest, we didn’t hear that much about it,’ said one junior E&Y employee. It is one thing to provide a cohesive party line at press conferences and marketing events, but it seems it is quite another to ignite the enthusiasm of the whole firm.

The disunity is not unique to KPMG and E&Y. Coopers and PW are also experiencing a culture clash. Peter Wyman, a Coopers board member and the firm’s merger spokesman, said: ‘Of course there are some culture clashes between Coopers and PW, and Europe, the US, and Asia. There are sometimes differences between the French, German and UK offices. But they are to be expected; they are manageable, and we have programmes to iron out bumps.’

Ian Brindle, senior partner at PW, told Accountancy Age that culture clashes would not be a problem because it will be creating ‘a new culture’.

Other problems are widely rumoured. But Wyman dismissed reports of ego clashes between staff at the two firms’ offices in Hong Kong, Singapore and Malaysia. ‘All the mergers are proceeding on course to hit our target date. Don’t forget that we have taken a worldwide vote. The minimum requirement was a two-thirds majority and, as far as I’m aware, there were no knife-edge votes.’

But there are one or two disgruntled employees in Asia, and the managers will have their work cut out to prevent defections – especially as it has admitted there will be some job cuts. Coopers’ Chilean practice defected to Arthur Andersen revealing a slight tearing of the international seams.

The failure of the E&Y and KPMG link-up also highlights the rigour with which the various regulatory authorities are going about checking on the mergers.

Of course, as Wyman and Brindle have both pointed out, they had anticipated a very thorough regulatory examination.

But E&Y senior partner Nick Land said he was surprised when the Australians and Canadians ‘suddenly started taking a more thorough line’. There is an argument to suggest the collapsed merger has focused the attention of such authorities on Coopers and PW, making their task even harder than anticipated.

What also became apparent last week was the strength of anti-merger feeling among clients. Even after Christopher Pearce, chairman of the powerful 100 Group of finance directors, slammed the mergers, KPMG and E&Y had suggested claims of dissent among FDs were exaggerated. But, last week, Land admitted ‘the client reaction in the UK was not great – and the UK was becoming less isolated in this respect.’

This week’s ‘Big Question’, a survey conducted by Accountancy Age in association with Reed Accountancy Personnel, found UK FDs did not think KPMG and E&Y’s images had been tarnished by the failed merger. It seems the FDs, mainly of small and medium-sized businesses, were just relieved the merger didn’t happen. The significance of this will not be lost on Coopers and PW although, as Wyman points out, the on-going merger would not create ‘a dominant’ (over 40% of total audit market) force in any of the regulators’ areas. The merger of E&Y and KPMG would have created a ‘dominant player’ in a number of nations, including seven in the European Union.

Even without merging, E&Y and KPMG remain enormous and incredibly competitive global organisations, and they will both be looking to benefit from the Coopers and PW merger.

They will be targeting partnerships looking for defectors, and they will be waiting eagerly to take on any discarded or dissatisfied audit clients.

In addition, Deloitte & Touche, which has made no secret of its ambition to pick up new work as a result of the mergers, will now be concentrating its attentions on just two firms. It is understandable Coopers and PW were pleased to see the collapse of the E&Y and KPMG merger – but it’s not yet time to ‘jump for joy’.

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