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BDO-Moore Stephens
BDO-Moore Stephens

BDO-Moore Stephens merger: First thoughts

26th Nov 2018
Partner An unnamed firm
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At certain points over the last few decades, it has sometimes felt as if the large end of the accountancy market has been determined to combine, combine again and then recombine in a determined effort to create a virtual monopoly.

Those with long memories will recall that what has now become the Big Four once comprised eight firms.

Even so, I am struggling to remember any mergers involving two top 10 firms in the last couple of years and therefore the news that BDO wishes to take over Moore Stephens has created a bit of a stir.

I can’t imagine that the Competition and Markets Authority will have much of a problem over this one, in part because, with all due respect, neither of these players is quite in the top league.

Indeed, in the 2018 league tables published by one of our rivals, BDO was showing UK fee income of £461m and Moore Stephens of £198m. Adding the two together comes to around £660m which takes the new, expanded BDO above Grant Thornton’s round £500m.

Regardless of any pronouncements from the firms involved, that is almost certainly the key motivator behind this strategy. The powers that be at BDO clearly wished to move themselves up into fifth place in the United Kingdom table above the firm’s perennial rival GT.

To be fair, GT has had so many problems in the last year that partners may not be focusing on the activities of competitors. The failure to spot a fraud at Patisserie Valerie followed by the acrimonious departure of the firm’s CEO is unlikely to bode well for the firm in the short-term.

It will be interesting to see how new BDO performs going forwards. Bringing two firms together which have very different cultures and client bases tends to have a number of consequences.

First of all, from past experience, it is likely that a significant proportion of the Moore Stephens partner grouping will disappear precipitately. This will result from a combination of age and lack of desire to work in the new practice.

It is highly likely that, in addition to wishing to increase the top line, BDO’s management see a fantastic opportunity to cut costs as a means of boosting profit.

One imagines that Moore Stephen’s London property in Aldersgate Street and others around the country will close in the near future, while many staff members could find themselves surplus to requirements, even if those that wish to join their new colleagues in Baker Street.

I have no doubt that figures on the inside making statements to the media over the next few weeks with regard to this “merger” will claim that it is good for the profession and should help to temper the perceived bad behaviour of the Big Four.

That is wishful thinking. I would imagine that new BDO will have fee income in the range of £600m-£700m once everything has bedded down. This is clearly big-ticket stuff if you are running a two-partner practice aspiring to reach £0.5m.

Using that same 2018 table though, I observe that even puny little KPMG is running at £2.15bn - ie 3½ times the size of this new venture, while PwC is up at £3.6bn.

That seems to be the view of BDO’s managing partner, Paul Eagland. I was fascinated to hear an interview this morning in which he commented about the knotty problem of audit conflict-of-interest. He boldly stated that it was completely wrong for the Big Four to have a monopoly and subscribes to the view that auditors should not provide any other services to major clients.

However, very pertinently Eagland proposed that any change should be restricted to FTSE 350 companies. I wonder whether this has anything to do with the fact that, as he stated, BDO’s target is mid-market and particularly AIM companies.

In any event, I wish those at BDO and Moore Stephens well for their marriage, which provides a welcome relief from other news today about a far higher profile divorce.


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By RedRooster
27th Nov 2018 16:39

Every few years there are major mergers within the Top 10.

On a lot of occasions, these just lead to windfalls for some existing partners and some fee income increases for the brand as a whole. You will destroy value there for some partners and lose notional fee income of both entities as clients become more expendable and the partners who lose out leave. The mergers that really grow value are bringing in boutique operators to the bigger players. For example, GT Ireland brought Foster McAteer 10 years ago who specialised in insolvency, just before the GFC. This made big money for all as specialists were brought into a bigger brand and could win bigger work. It was a win win and definitely took business from the Big 4.

I think what these Top 10 mergers represent is a tightening of the mid market. There is a pretty clear big 7 out there worldwide now; the Big 4, GT, BDO and RSM. Within each of the individual markets there are players who get into that spot, but those are the biggest worldwide and each have significant presence in the key US/UK markets.

What is interesting about the BDO network is that it is far more global than GT and RSM. Traditionally the latter two were bigger in the UK and US, but BDO have now overtaken GT in the UK and have grown exponentially in the US in the last 10 years (largely through taking over large regional practices). BDO would therefore seem well placed to become the fifth worldwide player, but the articles trumpeting competitors to the Big 4 always forget that these are;

- Individual practices with individual partners in individual countries. Some of the partners in the likes of GT would be pulling in serious pay packets, with their own market niche making them better off. Worldwide growth requires capital, who is going to leave food on the table? Who is going to coordinate that globally?
- Flowing from the above, these mergers are all in individual markets. There hasn’t been a worldwide network consolidation (which is what is required) since Price Waterhouse and Coopers. That is the difference maker.
- The Big 4 exists because of big audit clients. They don’t care about BDO and Moore Stephens merging. They care what their shareholders and banks think. They don’t care about having fully serviced international networks. The trust factor for the latter is huge – there are certain Big 4 network firms which are of a poor standard but are allowed to limp on because of the bigger market quality covering that up. That is a credibility issue that the mid players themselves (probably unfairly) face.

I do think we are reaching the point with the likes of BDO that they can scale up to another level though. They now have a large base in the US and UK. They have a large global network. If the collective partnership are smart, they will invest a slice in strategic locations designed to win specific larger audit clients. A potentially interesting PE move could be here as well. Why not invest into the BDO brand globally? The firm members all pay their network rates and you take a slice off that. Use the capital to invest in those strategic location areas rather than asking partners to take an immediate capital injection.

For the likes of GT and RSM, I would be seriously looking at trying a network merger with the likes of Mazars (big in Europe). Neither have the overall global network of BDO but remain very strong in the US and UK. Technology seems to be the next big thing to hit accounting networks, I think if you want to stay within the major mid market (like the Big 7 and others do now) and scale up to the top end (Big 4), you need a bigger global footprint

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Replying to RedRooster:
By Mrbailey
27th Nov 2018 16:58

I enjoyed this Redrooster. You know your stuff

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By Mrbailey
27th Nov 2018 16:56

Small is beautiful.

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14th Dec 2018 16:00

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The mergers that really grow value are bringing in boutique operators to the bigger players.

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