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April 30, 2008

Moving upstream

Moving upstream

There has been a growing number of mergers within the accounting industry worldwide in recent years. Carolyn Canham speaks to three US Leading Edge Alliance firms and industry experts about some of the drivers behind the trend.

The number of mergers and acquisitions in the US accountancy market is “off the chart”, according to Allan Koltin, the chief executive of PDI, a consulting firm with a client base that includes the largest 500 accounting firms in the US. “I would say I average almost one call per day now from a firm that is looking to merge upstream. For every potential seller, there’s probably as many that have a half-dozen acquirers.”

Social issues – in particular ageing partners and a lack of students – and insufficient succession planning are fuelling the merger trend, says Marc Rosenberg, president of management consultancy Rosenberg Associates. “There is a tremendous number of what we call baby-boomer partners at CPA firms. They’re five to ten years away from retirement and they take a look at their staff and their younger partners and they shake their heads and they say ‘these guys cannot take over the firm’,” he explains. To fund their buy-outs, ageing partners look to merge into larger firms.

Succession planning Gary Shamis is the managing partner of SS&G Financial Services, a firm with 400 staff and 20 partners. SS&G has completed several mergers in the past eight years. Shamis says SS&G has no concern about succession planning, however he has observed the trend in merger partners the firm has brought in. SS&G recently brought in a single partner from a five-partner firm: the partner represented 40 percent of the $5 million business and was concerned because the two older partners were nearing retirement and the two younger partners “weren’t very capable”, Shamis says.

One reason regularly cited for the lack of suitable successors for retiring partners is changing work ethic. Jim Metzler, the American Institute of Certified Public Accountants’ vice-president for small firm interests, explains: “Those baby-boomer partners… say the next generation is not ready – they don’t quite have the work ethic, they don’t have the leadership skills, they don’t have the entrepreneurial skills. [On the other hand] if you go to the next generation in those same firms… the younger practice leaders will say, ‘Are you kidding me? I don’t want to be like those guys, I don’t want to work night and day, I don’t want to fund a buy-out and live in poverty until I buy out the old partners.’ They don’t follow that carrot that many of us followed many years ago, [and] rightfully so.”

Lack of students Rosenberg says another reason for the lack of successors is that between 1995 and 2000 there was a one-third drop in the number of students achieving a degree in accounting. He says the people who would have graduated seven years ago would be the solid manager core now and those who would have graduated 12 years ago would be partner candidates.

Rosenberg points to the Sarbanes-Oxley Act as another reason for the talent drain. “Sarbanes-Oxley work is absolutely the pits,” he says. “There’s long hours year-round, not just in the tax season… and the work is as boring as it can get. These young kids who are joining these large firms are getting burnt out, they’re quitting.”

Mike Cain, the co-managing partner of 400-staff firm Lattimore, Black, Morgan & Cain (LBM&C), agrees: “Historically, we tended to get a lot of people who started with Big Four firms and then decided the Big Four environment wasn’t right for them. In the last few years we’ve had a lot more situations where those folks are pretty burned out in public accounting and they’re looking to move straight into industry.”

The talent drain not only creates an incentive for partners of smaller firms to merge upstream to secure their retirement funds, it also provides incentives for larger firms to look for smaller merger partners to boost their ranks. Koltin recalls an instance in which a managing partner of a top 50 accounting firm told him – somewhat sarcastically – that the perfect merger for his firm would be a firm with 50 staff and no clients. Steve Mayer, the managing partner of the 300-staff Burr Pilger Mayer (BPM), agrees the number one shortage in the accounting profession is good people. “If you have great people you can get as many clients as you want. If you have great clients but lousy people, you’re going to lose the clients. With one of our mergers, their clients were a lot smaller than ours but their people were great. Over a couple of years some of those clients will go away, but the people will stay,” he says.

BPM is embarking on a different strategy to attack the skills shortage. The firm is hiring non-accountants, such as bankers, managers and economists, to do accounting jobs. “They don’t know as much about accounting but what they don’t know, at the end of the year they’ll know,” Mayer says.

However, the notion that firms are interested in mergers more because of talent than clients depends on region, according to Shamis. “I’m in a part of the country where there’s very little growth, so the only way I grow is to take market share,” he says.

Middle market opportunity The demand from the larger firms for smaller firms to merge with also stems from a vacating of the “middle market opportunity base” that followed the demise of Arthur Andersen, Koltin suggests. The opening of the middle market has created great opportunity for LBM&C. Cain says by merging the other firms, LBM&C can “leverage their contacts with our size and our resources to be able to go after some of those larger clients”.

The desire to provide a wider range of services to clients is another driver behind consolidation, as is extending geographic reach. SS&G is a Midwestern firm that would like to be a national firm serving its niche markets of hospitality and health care. Shamis explains: “We’re not looking to become a Deloitte; we’re looking to put regional offices where we can be successful with them.”

The merger trend is going to “heat up even more”, Rosenberg says. He predicts that it will heat up so much that it will shift from being a sellers’ market to a buyers’ market and suggests this swing will occur in about four to five years.

Metzler predicts the merger trend will continue for about ten to 15 years. He agrees it is going to swing towards being a buyers’ market. “So, bottom line, you’d better be building a good firm,” he says.

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