NEWS ANALYSIS - UK firms: 'that will do nicely, thanks'

Small and medium-sized accountancy firms could soon be swallowed upised to do the same over here. Lawrie Holmes reports. in a buying frenzy by US and UK financial giants. The catalyst for such a move has been the remarkable success of American Express in buying up US firms to become the ninth largest accountancy firm there.

In the US, Amex targeted accountancy firms for access to their lists of small business clients. Once in, Amex had exclusive rights to sell its range of financial services.

To whatever degree Amex continues its aggressive policy on this side of the Atlantic, its trend-setting programme has clearly been a spur for UK-based financial companies eyeing up the enormous potential value of accountancy firms’ client bases.

Consultant Gordon Gilchrist says: ‘If Amex doesn’t do it, somebody else will. It will happen within the next two years.’

Merrill Lynch, Norwich Union, Pearl Assurance and Sun Alliance have tracked Amex’s progress and are considering how to dip into the market. Equitable Life looked at the possibility but has now backed off. All refused to comment about their strategies.

But Coopers & Lybrand partner David Stewart, the former chairman of the now-dissolved English ICA’s 2005 working party, says these companies would be very interested in improving access to the potentially lucrative clients.

Amex’s European portfolio lacks a base of small businesses, but offers fertile ground for servicing high net-worth individuals. This move would allow Amex to seize upon the new climate in the UK, where reduced welfare provision will inflate demand for better value financial products. Amex could offer a raft of cheaper services to the accountants’ clients.

According to Stewart, Amex has nothing to fear from regulatory control.

‘There aren’t really any barriers. It is not a regulatory area if it is purely financial services they are selling.’

Stewart believes the US is a very different market to the UK but this is not necessarily a hurdle. ‘They researched the US market pretty thoroughly and I suspect they will be doing the same in the UK,’ he adds.

It is not clear which firms are likely to be targeted, but those with a specialism in financial products such as Smith and Williamson could be in their sights.

Zahir Fazal, audit and national marketing partner at Group A firm Horwath Clark Whitehill, says: ‘There are doubts over whether different ethics will make it a success. But it would be naive to think it won’t happen. Realistically, if it is successful we will see it over here.’

Amex has made no secret of wanting to chase the Big Six in the US, pushing its $100m annual fees empire to $500m by 2000, and $1.5bn by 2010. Richard D’Ambrosio, the director of public affairs for Amex, says: ‘We want to be in any major markets.

‘As Amex takes stock and looks at new areas for growth the most likely place will be the UK, as a springboard to tackling Europe.’ Coopers’ Stewart says Amex will turn to the UK because it is ‘closest in style, structure of personal financial planning, stake in pensions and level of stock market investors.’

Amex’s US acquisition programme is clearly to access the small business sector. Having lost credibility as a service provider to small businesses, it started the acquisition programme under the subsidiary American Express Tax and Business Services. The need to develop new markets is exacerbated by losses in Amex’s Far East operation, leaving it with 1997 profits up only 1.2% to $460m on revenues up 8.6% to $4.52bn. As a result, chief executive Harvey Golub has stressed the need to build profits and revenues.

Key to the Amex acquisition are the very large financial resources it can employ in negotiations, paying a purchase price of between 75% and 115% of the firm’s annual billings. The reaction within the US accountancy profession has been one of concern, reflecting the fears of accountancy firms being undercut by the new pretender.

In a recent ruling, the Supreme Court in Florida permitted non-accountants to own CPA firms, opening the floodgates to Amex. It proved to be another landmark on the route to Amex’s goal.

The UK will present a bigger set of obstacles to an acquisition programme.

It would require a vast effort of resources to swallow a mid-tier firm such as Grant Thornton. Its strong entrepreneurial client base would be attractive but the job of talking over 250 partners would be huge.

But as Amex has proved stateside, the power of the wallet talks. Those firms approached could soon be rubbing their hands in glee, while the prospect for their local competitors could be bleak.

There are a number of ways in which Amex could gain a foothold in accountancy firms. ‘They could buy up small firms, or they could just recruit the people themselves,’ says Stewart. He thinks the main driver for Amex entering the UK could be to bring in IT and use it more efficiently. ‘If they do come in they will be very successful – they already have a lot of information to offer to a new client base.’