Group A: Start of a rush to the altar?

Last week’s announcement of BDO Stoy Hayward’s engagement to Moores Rowland has fuelled expectations that other Group A firms may soon follow the newlyweds down the aisle.

Geographical strength, cultural synergies and cost savings were cited as the firms’ key reasons for the marriage.

Ten Moores Rowland offices will be joining Stoys to create the UK’s sixth biggest accountancy firm, with fee income of around #150m.

Only last November Moores Rowland’s merger talks with Kidsons Impey broke down. Stoys managing partner Adrian Martin wasted no time moving in. Discussions with its new partner started the same month. Industry insiders say that Moores Rowland was on the rebound when Stoys came along. But few fear that the marriage – albeit one of convenience – is a mistake.

Instead most expect other Group A firms to be forced into mergers as the Stoys-Moores Rowland alliance highlights their own weaknesses.

‘The partner profit levels of Moores Rowland were not performing and I think that many Group A firms will now be thinking of consolidation,’ says one industry watcher.

These changes are not new. As the Big Six, and now Big Five, have gathered strength and prestige, it has become something of a matter of honour for FTSE companies to deal only with these major names.

Meanwhile, those firms languishing beneath have been forced to chase smaller contracts and devise other means to differentiate themselves from the competition. SMEs have become their lifeblood.

For those firms going it alone, it may be that client demands for a wider service could mean that efforts to push into niche markets are no longer enough. But is size really all that matters?

‘The problem is that auditing fees are stagnant and more banks are now competing against accountancy firms and consultants for the lucrative advisory contracts,’ says Essex University professor of accounting Prem Sikka.

‘But I think merging shows weakness and that firms don’t really believe what they have always said about adding value to their clients’ businesses.’

What really matters is what the merger means for Stoys’ and Moores Rowland’s client base. PricewaterhouseCoopers has generally held onto the audit clients of each pre-merger firm, despite the high-profile defections of Abbey National and Diageo.

This merger affects a different sort of client and the Federation of Small Business, representing about 130,000 small and medium-sized companies, says the future of the new firm, and others like it, depends very much on its attitude to this important group.

‘It could mean that services become more centralised and costs get pushed up which our members will have to pay through lack of choice,’ says David Hands of the FSB. ‘We say that most of the time, lack of competition is bad news.’

‘Big is better’ is not for everyone in Group A, though in time it may prove to be. For now, not every office within Moores Rowland is joining the new firm. Its Manchester office, which has opted out of the merger, identifies customer care as the main reason for its decision to go with another player.

Managing partner Tony Webley says that it was a great shame the business was being broken up and that too many accountancy firms were taking more notice of commercial growth and league tables than inspiring customer loyalty.

‘Our offices gets 85% recurring fees and Stoys has only a very small percentage from that source and we did not feel that we fitted in with that mix. Our client base would not give a monkey’s whether we are 1st or 21st,’ he said.

The Glasgow and East Kilbride offices are also opting out and are merging with Scott-Moncrieff Downie Wilson.

But it could be only a matter of time until the next mid-tier merger. ‘It is vital to the strength of the profession that the larger firms outside the Big Five have identities and are able to compete and succeed in their own sector,’ says English ICA secretary general John Collier. Prominent among the names mentioned are Kidsons Impey and Robson Rhodes.

Kidsons makes no secret of its desire to merge. Privately, some Kidsons partners acknowledge that a merger would be ‘beneficial’.

Others are more coy about the business of marriage. ‘We believe that all firms, not just in Group A, should constantly review their future.

But just because two firms decide to merge, it does not mean that others will necessarily follow,’ says a Robson Rhodes insider.

‘”Me-too-ism” is not for Robson Rhodes.’ Time will tell whether it is for others.

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