Mick James 30 Jan 2019 12:21pm

Is 2019 the year of M&A for UK accountancy?

The last two years have seen a spate of mergers among mid-tier accountancy firms, leading to much speculation that the top of the corporate audit market may at least become more competitive

BDO and Moore Stephens merger 630
Caption: The top of the corporate audit market may become more competitive

The most recent deal sees Moore Stephens LLP—comprising of the London, Birmingham, Reading, Bristol and Watford offices – exiting the Moore Stephens UK and international networks and join BDO. With revenues of £590m and 5,000 staff this will make BDO the 5th largest UK accounting firm, taking over from Grant Thornton as the perceived challenger to the Big Four.

However, while BDO managing partner Paul Eagland acknowledges that external market conditions, (in the form of the Kingman, CMA and Project Flora reviews) make this a timely move, it is only the “third leg” of the reasoning behind the merger.

“We had a fantastic experience merging with Pannell Kerr Foster, and Moore Stephens had a fantastic experience merging with Chantry Vellacott,” he says, “When you live and experience a merger at first hand and see the benefits when you get it right, it makes you more interested and wide open to having conversations with other like-minded people.

Eagland doesn’t believe there is such a thing as a “perfect fit”, but the combination does accelerate key strategies such as building out BDO’s financial services practice by adding Moore Stephens’ strength in insurance. More important was firms’ strength among mid-market, entrepreneurially-spirited businesses.

“Number one is strategy and like-minded people, but when you look at our current position, and how the combination would make us by some way the biggest and most powerful player in that market, then you say, proceed with the merger.”

As for the “third leg”, Eagland points that big corporate audits are not necessarily the prize.

“A lot of the commentary is around the statutory audit of those entities, but if you look at the other services those entities then one way or another we will already be providing some sort of service to up to 40% of the FTSE 350, or even higher,” he says. “The headlines focus on statutory audit of the FTSE 100: that is a part of the market but the world of professional services has moved on.”

This view is echoed by John Connolly, founder and group executive chairman of CogitalGroup, which recently bought top 20 firm Wilkins Kennedy as part of an acquisition strategy that has seen it grow to £500m.

“We don’t have any black-line thresholds if your revenue is above a certain size,” he says, “But what we can more easily identify are activities we wouldn’t have an interest in—such as trying to do complex audits for larger companies.”

Cogital is building a broader range of services than a typical accountancy firms would provide, focusing on area of non-discretionary spend such as payroll. And it is definitely building out its geographical coverage, taking its UK presence into Scotland with the purchase of Campbell Dallas and Springfords, while actively looking to enter the North American market with a major acquisition that will dramatically increase the scale of the business.

It has also been snapping up smaller acquisitions, often as an exit strategy for retiring partners, and offering a way forward for firms needing to adapt rapidly to technological change and initiatives such as Making Tax Digital. But the approach at both levels is people driven—the group recently backed out of a major acquisition that would have greatly extended its European footprint.

“I couldn’t satisfy myself that the leadership in that business really bought into what we were doing says Connolly. “It really matters that businesses buy into what we are trying to create because they will become shareholders in it as well.”

Client focus is a key Cogital value, and Connolly argues that, by taking back office functions out of firms and into its centre this immediately makes the acquired business entirely client focused – and this becomes an engine for organic growth.

“One business that we bought in London had always had high quality, high growth, but where that might have been 9% or 10% it’s now around 17% or 18%,” he says.
But firms looking to position themselves as acquisition targets need to focus on people as much as growth and profits.

“Profitability is in there somewhere but there are lots of other features in people businesses that rank very highly as well,” says Nick Jones, global head of M&A for Equiteq, which advises professional services firms on how to grow equity value and sell themselves. “The one question which comes up in every instance of advising our clients is how do you retain the people,” he says.

But the people who leave the business can be just as important.

“Just really look after whoever you are acquiring, says Campbell Macpherson, business adviser at Change & Strategy International and author of The Change Catalyst. “Even if they are leaving the business, look after them and make sure they are a really good PR story for your business afterwards. Otherwise, it'll end in tears.”

Unfortunately, too many businesses neglect the post-merger transformation.

“They ran out of steam, because the leadership fixes elsewhere, or they end up with a programme manager,” says Macpherson. “What’s lacking is someone that is dedicated to focusing on delivery, someone who is living, breathing and obsessed with delivering the outcomes.”

It’s an approach that worked well for Kreston Reeves, which brought together a number of long-established firms to create a multi-site practice covering Kent, Sussex and London. Despite the similarities between the firms—which had known each other for over a century the partners did not underestimate the work that would be needed to bring them together.

“If the culture doesn’t work it’s never going to work,” says audit and assurance partner Richard Spofforth, “But no matter how close the cultures are they’re probably not as close as anyone would like and that is just because people are different.”

He compares mergers to arranged marriages: “You know what you know, and you get on quite well but once you’ve had your marriage you still don’t quite know who puts which things in which cupboards. Don’t underestimate the amount of work post-merger: it’s probably more than pre-merger.”

For two years Kreston Reeves worked with an extended board, which essentially divided into two teams, one focused on integration and the other on taking the practice forward.

“The danger was that we’d wake up two years down the line and find that the world had moved forward and we hadn’t, “says Spofforth. “Or we could have spent a whole load of time looking forward and not doing the integration.”

Although the pool of candidates is narrowing, the wave of mid-tier accountancy mergers looks unlikely to slow and may soon move to a level beyond in-country acquisitions.

“What I would like to see in my lifetime would be a merger of two international networks, which would be very powerful, very effective and would add value on so many levels,” says BDO’s Connolly. “We would definitely be open to a conversation about that.”