With more than two dozen unions lighting up the M&A scorecard in the span between October and the holidays, and scores of others scattered liberally throughout the year, CPA firm mergers may have hit a high water mark in 2011.
Though blockbuster combinations such as Clifton Gunderson-LarsonAllen (which created a $550 million firm with 80 offices and 3,600 employees), Dixon Hughes-Goodman (a near-$300 million firm with 1,700 people), Burr Pilger Mayer-Windes McClaughry and Grant Thornton-CCR dominated the headlines, smaller deals involving firms such as WithumSmith+Brown, Moss Adams, CBIZ, Henry & Horne, Lewis & Knopf, Friedman, and even Canada-based MNP - which swallowed up a series of small practices throughout the provinces - contributed to the frenetic pace of firm consolidations in 2011.
But if you thought that last year kept M&A watchers busy, experts predict that 2012 will be even more frenetic in the M&A space for CPA firms.
"We not only expect it to continue, it will probably escalate substantially," predicted Dave Sibits, president of CBIZ Financial Services, which in July signed a deal to acquire the non-attest business of Thompson Dunavant, expanding the firm's presence to Memphis, Tenn. "If you look at the reasons so many firms are dancing with each other, it's that people are beginning to recognize that being a mile wide and an inch deep is a tough way to grow."
Allan Koltin, chief executive of Chicago-based Koltin Consulting Group - who was involved in more than 30 merger discussions throughout 2011, one third of which came to fruition - said that M&A activity over the past five years has increased each year, despite the past recession and still-uncertain economy. "It would have seemed logical that buyers would have been more internally focused and sellers would have put selling on hold until their numbers improved, but, surprisingly, both groups continued to engage even during some of the most difficult financial times," he said.
"CPA firms find themselves with shrinking margins and realization rates and significant downward rate pressure," explained Steven Berger, a shareholder with the law firm of Vedder Price and a veteran of helping structure CPA firm mergers. "To remain competitive, firms are forced to adopt new technologies which come with sizable price tags. Managing partners find themselves with a distinct lack of capable successors. Retiring partners are losing confidence in the ability of their firms to survive in longevity, which, in turn, casts doubt on the viability of their retirement packages. And with the adoption of mobility statutes in 47 states, it's easier for out-of-town firms to establish local beachheads by acquiring offices and practice groups. By the end of 2012, there are likely to be more consolidations, geographic expansions and absorption of smaller firms than there have been in the last several years."
Sibits of CBIZ revealed that his firm would be aggressively pursuing deals in 2012.
"We start with identifying the best of the best and which firms would we like to talk to. We did that with Tofias [which CBIZ acquired in 2008]. We also look for firms who may not have a reason to sell other than they perhaps want to be part of something larger. But we're doing acquisitions as opposed to mergers. We're actually writing a check."
"If you just talk to the [M&A] brokers, 2012 is going to be very active," echoed Lou Fuoco, managing director of CPA and business advisory firm Fuoco Group, with offices in New York and Florida. "One of the keys is the Baby Boomers are getting ready to retire and are thinking, 'I built this value and need to find a way to maximize this value and retire.' So there's either internal or external succession and internal succession could take up to three-to-five years. When you're talking to small and medium-sized firms, many times there's no second tier of labor behind them to take over, so sometimes their only exit strategy is a merger."
Fuoco, who explained that he receives up to six e-mails a day from prospective sellers, looks seriously at roughly four or five deals a month.
He maintained that acquiring companies that offer niche services you may not have offered before will also help retain and grow the client base.
As an example, the firm acquired a technology company and folded it under its technology consulting unit, as well as a marketing concern. "Clients don't want to deal with a firm that's only going to do a tax return," he said. "Traditional services are not going to be enough."
Doug Parker, a partner at the law firm of Dykema, has helped his CPA firm client Doeren Mayhew with a number of its mergers and acquisitions, like last year's union with Texas-based T.R. Moore.
"There's always opportunities out there," said Parker. "Somebody is looking to buy and someone is looking to sell. So ears are always open and it's like a 'Let's have lunch' sort of thing."
For the past seven years, Dykema has published a mergers and acquisitions survey, compiling responses from roughly 300 CEOs, CFOs and company officers on the overall climate as well as the future of M&A.
Parker said that this year's poll showed that buyers will continue to drive M&A activity as a means to achieve growth.
"Overall [M&A] is a mixed bag," said Parker, who began his career as a CPA. "There's an increasing need for buyers to deploy capital and that's helping drive valuations. But there's still uncertainty about that economy and that may prevent some of the most significant deals from happening and there's pressure out there for deals to be done. But the accounting profession seems to be more robust than most."
Although not every negotiation ends up with a signed deal, Sibits of CBIZ said that once talks begin in earnest with his firm, it usually results in an agreement.
"We've been fortunate we haven't walked away from too many deals. When we didn't move forward there were good reasons. We had a pair of deals fall through which would have been great for us, but some of the younger group in the firms that were being acquired were not thrilled. We want everyone on both sides to be happy about it."
Said Koltin, "It's safe to say that CPA firms truly are now using the triangle offense to grow. It's a three-pronged approach that includes organic growth, acquisition of lateral talent, as well as M&A. M&A has simply become a common placeholder in terms of affecting growth strategies for firms."
