| Consolidation and regulation dominate the year for Irish accountants |
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| Merger and acquisitions among accountancy firms worldwide is creating a dynamic industry in Ireland says Anthuan Xavier. |
The dawning of the new millennium marks the beginning of a new era for the accountancy profession as we know it. In a profession which is plagued with a reputation for dullness, exciting things are happening. A plethora of mergers and acquisitions have rocked the industry. Consolidators pose a real threat to the traditional accountancy firm by plundering their more lucrative services. And the audit function is emerging like a phoenix from the ashes, in the wake of the current SEC recommendations, and the implications from the recent DIRT tribunal.
The high level of mergers and acquisitions that are occurring has resulted in windfalls for many partners in some of the worlds’ leading accountancy practices. Traditionally the structure of accountancy firms has tended to be partnerships. This has made it difficult for partners to realise their capital value.
The sale of Ernst and Young’s consultancy business to Cap Gemini generated $11 billion for the partnership. In another merging of IT and Consulting services, Cisco Systems recently acquired a 20 per cent stake in KPMG’s consultancy arm. With an IPO now in the offing, this will generate significant capital gain for the partnership. Similarly, the abandoned take-over by Hewlett Packard of PwC’s consultancy business would have allowed partners a way of cashing in the value of their fast growing consulting business, giving them their independence as well as a significant windfall.
The merger trend is trickling into the mid-tier market in Ireland, which experienced a number of mergers, the most notable being that of Grant Thornton and John Woods to create the seventh largest firm in the Irish market. Mergers and acquisitions will continue to be a feature of the profession. Firms increasingly find that they do not have the resources or funding to organically grow at a pace that will allow them to meet their clients increasing demands for a more national and international approach.
The recent arrival of consolidation fever on European shores has also rocked the industry here. What started out as an American trend has rapidly gained momentum as consolidators begin to emerge as a force to be reckoned with. The most prominent UK consolidator, Tenon, managed to secure ?50 million funding and subsequently floated on AIM. The company, which aims to have a turnover of more than ?100 million within two years, has already pulled off its second acquisition within two months. It acquired the William Allan Group for ?9 million this month, having already acquired Morison Stoneham for ?11 million in October.
Similar to their US counterparts, Tenon is responding to a growing requirement on the part of the consumer for a one-stop-shop for financial services. In short they are looking for someone to integrate their financial services requirements, but who will also provide them with the comfort and security of a recognised brand.
The Big Five have become global players catering to global clients. However, there is a gap in the market for firms to service indigenous growing and entrepreneurial businesses for whom intimate knowledge of the business and the relationship is still important. Consolidators have been quick to recognise and exploit a window of opportunity that exists to focus on national businesses that still require a wide range of financial services.
While we have yet to greet the arrival of consolidators on our shores, its foothold in the UK, and previously the US, is certainly a sign of things to come. The growth of consolidators in the profession is being driven by firms’ need for access to capital, which have been constrained by the partnership structure that prevails within the profession, a structure which is being reviewed by many practices.
Perhaps the most controversial issue to emerge this year is regulation of the profession, particularly in the area of audit. The fall-out from the outcome of the DIRT tribunal threw the whole industry into turmoil, and led to questions being posed by the Tainaiste as to the ability of the profession to regulate itself. The growing concern over auditor independence is one that will not go away.
The core business of audit had become somewhat of a loss-leader, which companies saw little value in other than to meet statutory requirements, and which the accountancy practice used to gain access to clients in order to sell them more lucrative additional services. However recent events have propelled audit to centre stage.
The SEC in the US has taken a strong line on the potential conflicts of interest which exist in a multi-disciplinary firm, while the Irish Government is making noises about setting up an independent statutory Oversight Board to supervise the industry. These events, along with the demerger of many consultancy and advisory services of practices, has shifted the limelight back to audit. Audit is now commanding much respect, being seen as a core business of the profession and the benchmark by which a firm can be judged.
The year 2000 will be remembered most as a year of awakening for partners in Big Five firms, who were able to unlock substantial value at market rates for parts of their business. Their experience will act as a catalyst for mid-tier firms for years to come.
Anthuan Xavier is managing partner at BDO Simpson Xavier. |
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| Article appeared in the December 2000 issue.
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