BDO chief Jeremy Newman would like competition watchdogs to seriously clamp down on Big Four firms that acquire significant mid-tier firms, as has happened twice in Brazil in the past year.
Newman warned that if Big Four acquisitions aren’t reigned in, the mid-tier would never be able to grow to a size that can provide competition to the Big Four oligopoly on large scale audits.
“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.”
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.
Newman said the network tried everything it could to keep BDO Auditores Independentes, which is easily the fifth largest firm in the country with revenues of BRL101.4 million ($62.5 million). However, Newman said the money tabled by KPMG was too high for the firm to turn down.
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.
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 its revenue to with $10 millions of its nearest rival.
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.
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.
BDO’s complaint cannot take place until after the acquisition is completed, which is expected to be 31 March 2011.
Baker Tilly Brasil grows as a result of merger
It’s not just the Big Four who are consolidating. Baker Tilly Brasil said it has seen substantial growth due to the December merger with Nexia Villas Rodil.
In one fell swoop this combination added about 20 percent to Baker Tilly International’s Latin American revenue.
The merger, which went into effect 1 December 2010, involved the Sao Paulo office only, but Baker Tilly Brasil chief executive Osvaldo Nieto expects the firm to move from seventh position to sixth in the country.
Nieto said the firm was attracted by Nexia Villas Rodil’s position in the middle market, its professionalism, complementary skills in international and domestic tax, technical skills and the possibility of accelerating growth with a ‘high-quality and market-oriented team’.
Ricardo Rodil, who had led Villas Rodil and will now be the international practice partner of the combined firm, says the firms began talking five years ago.
“Who knew the audit market in Brazil would undergo such market concentration – now bigger is stronger,” he said.
“The choice of the Baker Tilly International affiliation was a natural one, given that we feel this network is better positioned in the global marketplace. And the new, integrated firm is one of the most international in the second-tier sector in Brazil.”