BDO-Moore Stephens merger: First thoughts
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.