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Mergers: Not so much a fever, more a fatal epidemic

14th Sep 2015
Partner An unnamed firm
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Looked at in the cold light of day, mergers between accountancy firms are a recipe for disaster.

Part of the problem seems to be the need to lie to the world about what nobody dares describe as a takeover.

In reality, what usually happens is that one failing firm takes over another which is doing even worse. It does not take a genius to work out that two failing organisations are unlikely to become one successful one when put together.

Typically, the reasons for failure will be lack of management initiative and inability to read the market on both sides. Neither of these problems is likely to be resolved by piling on the confusion of post-merger acclimatisation and rationalisation.

One of most serious issues is delusion, often self-delusion. Almost every "merger" is greeted with messages of delight by both managing partners.

The boss of the larger firm boldly states, “Both of us share exactly the same culture and by working together we will cut fixed costs and increase top line revenues. Because the staff on both sides are so good, we want to keep them all and are going to build a bigger, more successful organisation going forwards.”

In reality, what he or she should actually be saying is, “We would love to sack almost everybody from the firm that we just took over, but keep all their clients. In this way, we might stop our otherwise inexorable slide into mediocrity and head off the prospect of getting taken over ourselves”.

You can immediately see why self-delusion is far more common than honesty. The typical consequence is that three to five years later the merged firm, having spent ridiculous amounts on redundancy costs without increasing the top line at all, is forced to sell out to another unsuccessful competitor to ensure that the cycle is perpetuated.

The best corporate raiders would find this situation laughable. They know that the only way to get rich quick by putting two ailing corporates together is to rape and pillage, cutting costs ruthlessly while doing your best to maintain the top line.

They would not stop at cutting the cost of premises and possibly administrative staff. Before doing the deal, they will cynically have looked at every member of staff (including the partners) to determine which are necessary to ensure the success of the business going forwards. They will also budget properly for the costs of making the vast majority redundant.

What is the solution? The best bet for firms that are doing badly is to improve the fortunes of their own practices by strategically cutting costs while maintaining or even increasing turnover.

Rather than pursuing a merger strategy, it will almost certainly be better to bring in individual partners with missing skills or small niche practices that could enhance the existing offering.

In reality, if managers are unable to achieve this, they are unlikely to do much better by buying out a smaller competitor. Though they might cover up their failures for a few years by doing so.

Some reading this article might think I’m an idiot. Or those who I’ve convinced will believe there will never be another merger. Whichever side you’re on, the merger machine will no doubt roll on, regardless of its almost unblemished inability to yield a success.

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7om
By Tom 7000
15th Sep 2015 12:30

How strange

I really cant see how a firm of Accountants can be struggling and lose money and need to merge to save themselves. Most of them are accountants and business advisors and if they are advising their clients surely they are clever enough to run their own show profitably.

 

So to me the above really doesnt make amy sense. It can apply to other businesses though

 

 

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By The Highlander
15th Sep 2015 14:48

RSM Tenon springs to mind but I would agree Tom 7000 it does seem baffling that accountant/business advisors can get themselves into such a mess. 

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By The Imprudent Accountant
16th Sep 2015 08:20

Two Words

Arthur Andersen

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
17th Sep 2015 14:29

Are you sure?

I don't think it was it's history of mergers that did for Arthur Andersen - but you may also have spoken a bit prematurely. We hear that the Andersen brand is likely to ride again according to news just in from France.

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