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March 23, 2011

KPMG acquires Brazil’s 5th firm

KPMG Brazil is on the verge of acquiring BDO International’s Brazilian firm, which has provoked BDO to file a complaint with the country’s competition watchdog to try and halt the buyout.

BDO International chief executive Jeremy Newman said the network tried everything it could to keep BDO Auditores Independentes, the fifth-largest firm in the country with annual turnover of BRL101.4 million ($62.5 million).

However, Newman said the money tabled by KPMG was too high for the firm to turn down. In response, BDO admitted former Crowe Horwath International firm RCS Auditores Independentes, which reported revenue of BRL20 million in 2010.

KPMG’s acquisition follows last year’s Ernst & Young buyout of Terco, a former Grant Thornton member that was also the fifth largest firm at the time. KPMG Brazil chairman Pedro Melo said the acquisition provides KPMG with a “quantitative and qualitative leap in our segment”. It also allows KPMG to increase revenue to within the $10 of millions of its nearest rival.

Concentration grows

Taking out the two largest non-Big Four firms has left a huge gulf between the smallest of the Big Four and the next-largest firm in Brazil. Instead of being a fifth of the size, as was the recently the case, the largest alternative to the Big Four is now nearly 20 times smaller in revenue terms.

Newman said he was first concerned about a raid when Ernst & Young acquired Terco because this created a BDO Auditores Independentes- sized revenue gap between Ernst & Young (third) and KPMG (fourth).

“These tactics are not driven by client needs but by one firm’s wish to buy market share and presumably achieve further economies of scale,” Newman said.

In the initial negotiations, Newman said he was confident Auditores Independentes would stick with BDO, but towards the end of 2010 an unrefusable offer was put forward. To its credit, Auditores Independentes kept BDO informed throughout the negotiations and will honour all of its client work for BDO.

The timing of the buyout couldn’t be more ironic as policy makers in Brussels consider ways of diluting Big Four market concentration in the EU. “It is difficult for firms and other networks outside the Big Four to develop their position in countries like Brazil,” Newman said.

“The gap that will be created now between the Big Four and firms five and six in Brazil [GT and us] is enormous.”

The complaint process will take place after the acquisition is completed by 31 March.

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