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March 28, 2011

Newman clamps down on Big Four buyouts

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).

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“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.”

 

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