Accounting for Mergers Firms Say Their Clients Want to Deal with Bigger Companies

Article excerpt

What a year for mega-merger announcements. Northrop Grumman is

combining with Lockheed Martin. Boeing is buying McDonnell

Douglas. Barnett Banks is joining NationsBank. To name a few.

But with little fanfare -- and far fewer headlines -- two

other mergers were announced this year that arguably are just as

significant, if not more, than the marquee marriages.

In rapid-fire succession, the world's "Big 6" accounting firms

announced plans this fall to become the "Big 4."

First, in September, Price Waterhouse and Coopers & Lybrand

said they plan to create the world's biggest firm with $12

billion in combined revenues last year and 135,000 people,

besting Arthur Andersen, which has a staff of about 91,000 and

annual revenues of about $9.5 billion.

A month later, on Oct. 20, the Price Waterhouse-Coopers deal

was topped by the proposed merger of Ernst & Young and KPMG Peat

Marwick. The combination would create a firm with $16 billion in

revenues and more than 160,000 workers.

The consolidation of the big accounting firms (there were

eight of them 10 years ago) is important to follow because these

are the same firms that audit the financial statements of most

publicly owned companies in the U.S. and abroad. Companies and

investors alike rely on these audited statements when making

investment decisions.

So what's driving the bean counters to merge?

The accounting firms insist that they are merging because

their clients are demanding it.

BIG IS BETTER?

As big, multinational corporate behemoths get larger and larger

and extend their reach further and further around the globe, they

want an accounting firm with equal girth.

That means as big companies set up operations in developing

markets, whether it's Tiblisi or Taipei, accounting firms are

being expected to do likewise.

"Clients are demanding big," said Rick Telberg, editor of

Accounting Today in New York. "They want to know their accounting

firm is just as big as they are."

Big clients also are demanding that their accountants be able

to provide a wide range of specialized professional services,

everything from traditional tax planning and auditing to solving

computer problems and assisting with mergers and acquisitions.

But controlling costs and propping up profit margins are just

as important to the accounting firms.

Introducing a new worldwide tax-saving program for

multinational corporations, for example, can cost about $100

million for the software, equipment and training. By combining,

two firms can get more bang for their buck.

"Technology costs are so massive, and technology is changing

so rapidly, it makes sense to merge," said Charlie Calhoun,

chairman of the University of North Florida's accounting and

finance department.

An accounting firm's biggest expense is professional talent.

Consolidation among the top firms can control these costs by

holding down the bidding for top talent, especially consultants,

the fastest growing area for most large accounting firms.

And, like most mergers, the firms will be able to reduce costs

by eliminating redundant jobs. Two merging firms don't need two

managing partners in each of the cities they are located. Nor do

the firms need two complete sets of administrative staffs,

computer technicians and marketing departments.

Meanwhile, the accounting firms also hope the mergers will

help shore up sagging profit margins.

Competition and technology have turned basic tax and audit

services into low-price commodity products. …

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