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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.

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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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