Top 50 Analysis - Merged firms will rule in the mid-tier.

Mid-tier firms that have already undertaken mergers and acquisitions are leaving firms who seek to go it alone behind, according to detailed analysis of the Accountancy Age Top 50. The last two years in the world of accountancy practice have been punctuated with declarations from mid-tier senior partners to the effect that, while not actively seeking a merger, serious and sensible offers would always be considered. For four mid-tier managing partners those serious offers have turned into action. Grant Thornton and HLB Kidsons have declared their intention to form one national firm with a combined fee income of #230m. They now enter a period of consultation with partners across both firms, with a target date of 1 January next year for the implementation of the merger. Baker Tilly and Fraser Russell are further down the track with an effective merger date of 1 July. The fee income of the combined firm reaches #70m. These announcements mean the running order of the mid-tier is already being redrawn – we’ve taken the two mergers into account and created a new mid-tier league table (see below). Grant Thornton leapfrogs BDO Stoy Hayward to become the biggest UK mid-tier practice with a #70m lead over Stoys. Baker Tilly – post merger – stands at fifth place. Further down the table, there is a concentration of 10 firms with a fee income of under #20m. Once again questions about the sustainability of 20-plus national firms competing for a heartland of small and medium-sized enterprises and owner-managed businesses are being raised. There is little doubt that this year’s results show an increasingly polarised marketplace. With the Big Five firms growing at twice the rate of the mid-tier, there is further scope for the stronger mid-tier players to consolidate. The firms that are beating the average growth rate for the mid-tier (12.35%) are, not surprisingly, those who have already gone through mergers or who have acquired other firms. Baker Tilly’s 20.3% growth in our 1999 league table included fee income for a full year from the London office of Casson Beckman. Its 17.3% rise this year shows it benefiting from its #2.8m merger with Gruber Levinson Franks – even before it aggregates figures from the merger with Fraser Russell. Stoys’ growth rate of 31.2% for the year ending March 1999 included the income from 10 offices from the Moores Rowland network. The firm is releasing its annual report in September. And Levy Gee, which grew by 21%, drew in #437,000 from a merger with Wagners. Only Lathams and Bentley Jennison, further down the table, report above average organic growth – Bentley Jennison’s an impressive 26%. RSM Robson Rhodes, which had intended to merge with Pannell Kerr Forster early last year, reported the lowest growth figure within the mid-tier at 3.1%. PKF this year rallied to 8% growth, after a much lower figure two years ago (2.3% for year ending 30 April 1998). However, both firms have a much less weighty infrastructure compared to other mid-tier players. PKF has 114 partners in 30 offices compared to Stoy’s 313 across 45 locations. Robson Rhodes has 53 partners across seven locations. Accordingly, the firms benefit from a high fee income per partner ratio – over #800,000 in both cases – a factor that presumably makes merger negotiations difficult. Robsons and PKF are far from being alone when it comes to the formal dancing of announcing a merger and then retreating from that position. A firm’s partnership structure can make merger negotiations difficult. Grant Thornton’s national managing partner, David McDonnell says he has seen the future for the mid-tier – and it lies with the emergence of a very small number, perhaps only three or four, key national players. These firms, he says, will need to form single national partnerships in order to have the fire power to invest and deliver across one national entity. But does this mean a federal firm cannot compete at the upper end of the mid-tier? Richard Emanuel, marketing partner at Stoys, say not. ‘There is real benefit in being able to organise certain resources on a national basis – IT, marketing communications and knowledge management for example. At the same time, it is very important to give regionally based partners the freedom to respond to their local marketplaces. This is less a debate about structure than it is about how you best achieve the right balance between centralised initiatives and local knowledge and insight into local marketplaces,’ he says. And while the Grant Thornton/HLB Kidsons merger looks set to create another layer within the mid-tier, firms may do well to stick to existing strategies and brands rather than try to widen their offerings. ‘Does it help clients to segment the profession into still more tiers? It’s the firms that are really focused and can both communicate and deliver products and services of relevance to their chosen markets that will prosper.’ www.accountancyage.com/top50 Big Five race away www.accountancyage.com/News/1105854 David McDonnell on the mid-tier www.accountancyage.com/Comment/1106191