When Price Waterhouse and Coopers & Lybrand announced last year they were planning to merge, it was perhaps inevitable that others would attempt to follow suit. So when the proposed link-up by Ernst & Young and fellow Big Five firm KPMG was announced in October 1997, the profession gave it a frosty welcome. Many finance directors were ready to 'slate the merger plan' before it had really got off the ground.
Much controversy was to follow when the two firms were accused by FDs of trying to secure European Commission backing for their scheme by sacrificing self-regulation.
But on the fateful day of Friday 13 February, after four months of talks, the shock news emerged that the merger was off. Both firms blamed ‘increasing difficulties’ with the regulatory process, together with the costs and resources required to merge their cultures, for the surprise decision.
The collapse was widely welcomed by the profession, particularly those involved in the other Big Five merger. Coopers board member Peter Wyman said he was not surprised the merger had failed due to the regulatory difficulties. ‘We have been very doubtful that the KPMG/E&Y merger would be allowed through,’ he said.
The FD 100 Group welcomed the end of the merger as ‘a victory for common sense’, suggesting its success would have reduced competition in the market. The group claimed the decision to call it off would benefit all large organisations that used Big Six firms as auditors.
Christopher Pearce, the group’s chairman, said competition between the major accountancy firms would have been restricted if the merger had gone ahead. ‘It’s good news. We have said from the beginning these mergers restrict choice, particularly in audit-related services like due diligence,’ he said.
Concerns about the fallout from the collapse were widespread. Wyman said both E&Y and KPMG would ‘have to work extremely hard to restore any credibility in the eyes of partners, staff and clients’. Disgruntled KPMG partners told Accountancy Age they expected a backlash after E&Y pulled the plug.
The partners warned E&Y had gained access to previously confidential information after details of operations and products were shared by the negotiating teams.
Reaction at PW and Coopers, on the other hand, could be described as jubilant, according to literature distributed at the time. But KPMG chief operating officer Mike Rake dismissed the claims as the grumblings of a ‘tiny minority’.
The failure of the proposals seemed hardly likely to inspire confidence in the two firms. Accountants are meant to know about business strategy.
Getting their own plans wrong could only reflect badly. But FDs quizzed for Accountancy Age’s Big Question survey begged to differ. Only 26% of the 200 FDs polled said the two firms had tarnished their image by abandoning the merger.
The anticipated fallout never arrived. The proof finally materialised last week, when E&Y published its annual results. E&Y chairman Nick Land said the collapse had no major impact and the firm managed to avoid internalising. The accounts reported a 19% increase in fee income to #633m – enough evidence to suggest that the firm which some feared would lose credibility after the collapse, had recovered from any loss of face.