When choosing membership in an association or network, accounting firms must prioritize the needs of current and prospective clients. But what happens after two firms belonging to two different associations or networks merge? And what are the implications for member firms when the association or network itself consolidates?

In today's mergers-and-acquisition-manic landscape, both scenarios are occurring more frequently.

Tom Marino and Ken Baggett, co-CEOs of Top 15 Firm CohnReznick, recently confronted the issue when their former firms, Reznick Group and J.H. Cohn, respectively, completed a merger in October 2012.

Marino was one of the founding members of global network SC International and world chair when it merged into international network Nexia International in 2007. Meanwhile, Baggett was chair of IGAF Worldwide, which merged with Polaris International and Fidunion International in 2011 to create IGAF Polaris, rebranded in 2012 as PrimeGlobal.

"In our respective mergers, we were initiators of the merger," Marino explained. "Me with SC International, and Ken with his -- it was a matter of filling in the gaps. That is going on now in the marketplace, with the mergers that have taken place."

For the later consolidation of their firms, Marino and Baggett could draw on some of this previous M&A experience at the international network level. "One of the big drivers, why IGAF and Polaris did their [merger] and why consolidations take place is almost no different than the consolidation reasons for firms: greater geographical coverage, strengthening the marketplace where one association is weaker than the others," Marino continued. "The association is coming together and merging because size and coverage matter ... When J.H. Cohn and Reznick came together, it made sense because we needed something."

Those needs were a "strong combination of geographic reach, diverse resources, and deep industry expertise," Baggett explained at the time.

 

SPOILED FOR CHOICE

While mergers can multiply firm services, moving forward as a single entity requires the tough decision of choosing just one association or network.

"When firms merge, they get together in a conference room and decide, 'Which network will we go to?'" shared Rob Tautges, CEO of independent accounting firm and business advisor network HLB International. "You're going to have networks winning and losing based on those decisions. For me, it makes sense to size up the amount of cross-border work and relationships, and go with the best shot."

Marino and Baggett did just that, putting aside their individual leadership connections. "When we sat down, both of us were founding members of [the networks] and had been very active as North American and global chairs, but we had to look at it from a business standpoint of what we were each getting from the association, and look at it from a delivery for the client standpoint," Baggett explained. The decision was ultimately made, he continued, "by an independent group of senior people; Tom and I stayed out of that. The work J.H. Cohn was doing, they were utilizing Nexia in a far greater way than IGAF with the Reznick Group."

Outlining a business case made it easier to communicate the decision, though it was still "touchy, personally" for Baggett to tell his former colleagues. "I talked to [the IGAF leadership] and said, 'You guys are great fellow leaders and personally, as friends, but we don't use the association as much in client-delivery services,'" Baggett recalled. "That was the tipping point, because both [networks] were great relationships, but the tipping point was the strength of it in the long term. For a firm deciding which association to go to, you have to look at it as the one with the best delivery services to my clients today or the clients I want to get tomorrow."

Occasionally these pre-merger discussions trigger more consolidation, at the international level.

"One firm liked our network so much, and the other firm [they were merging into] liked [theirs] so much, they had discussions about us merging our networks," Tautges shared. "So we did."

 

RELAXATION ON REPRESENTATION

Typically, though, firms have less decision-making power when their association or network merges.

"The biggest problem post-merger, when there's a merger like between SCI and Nexia, is that some firms, especially in the Third World, don't want dual representation, so as a result, typically there is some fall-out as a result of the merger," Marino said.

Eight Belgian firms belonging to global accountancy network Moore Stephens International recently solved this multiple representation issue with a merger of their own.

"Belgium is a very small country, and all eight firms were Moore Stephens members," explained Alexandra DeFelice, senior manager of communications and program development for Moore Stephens North America. "The largest firm decided to take on a very aggressive merger approach, and rolled in the other firms under the umbrella of their name, and [also] took the Moore Stephens name."

While firms in more competitive regions covet territorial exclusivity, it can be a risky policy for some associations or networks in the current economy. "Associations or networks were once more likely to have one representative in each city, a major city," Marino explained. "We have two [firms] in the U.K., two in London. More and more, it has become prevalent - it helps protect against the potential loss because of a merger, or a firm joining another network."

"It's very hard for an association to give a firm a city, and tell another firm that they can't acquire a firm in that city," explained Alan Deichler, president of national association CPAmerica. "You obviously can't tell someone they can't expand into a certain place, so exclusivity goes out the window." Instead, the association approaches the "geographic considerations" on a case-by-case basis. "CPAmerica wouldn't recruit a firm within 50 miles of the headquarters of a current member. Otherwise, that would cause serious confusion, unless you're willing to tell someone to leave - and some are, but that's pretty dramatic stuff."

"You have to look out and have a Plan B, look for firms in the particular markets where you know you'll have a good chance of losing the firm," shared Steven Sacks, executive director of Moore Stephens North America.

In some cases, of course, mergers don't necessarily present an issue for an association. "If, say, Pittsburgh merges with Philadelphia, and they're both with CPAmerica, we theoretically wouldn't have a member firm headquartered in Pittsburgh, but we'd have representation there, so we may not need to recruit someone," Deichler said.

With some associations and networks taking on a more aggressive loss-prevention approach, the threat of firms trading up is more prevalent, according to Marino. "There is more soliciting as firms look to improve their network. If a network loses a U.K. firm, they are interested in talking to a U.K. firm that's interested in a move. One of the international groups called up a member firm, a Nexia firm in the U.K., to say, 'You want to join us?' That didn't happen a while back - international groups believed in one firm, one country. Some of that has gone away now, as they are susceptible to losses, and dual representation is not considered a bad thing."

"A big change took place," Baggett agreed. "In Europe, it's very much about territorial rights, because of the smaller geography. It's no different than CohnReznick, the LarsonAllen and Clifton Gunderson merger [in 2012 to create Top 10 Firm CliftonLarsonAllen]. All of a sudden, an association on one side lost representation. When you only have one firm in that country, you have nominal coverage. Associations and networks are starting to find and work through having multiple firms in different countries."

 

THE FINAL PUSH

Like CohnReznick, the newly merged CliftonLarsonAllen chose Nexia as its international network. "More firms leave one network or association for another if there is a better opportunity," Marino said. "If a good-sized network loses an affiliate because of a merger, they want to replace them, if they think a firm can move them up the food chain of network standings."

Naturally, the secrecy surrounding most mergers makes it difficult for member groups to prepare. "The actual process is so confidential that no one knows until it's done, and by that point, we're at the point of reacting -- and we do," said CPAmerica's Deichler.

Once a merger is announced, networks and associations must rally the member firm to advocate for continued membership. "If you have a firm that's going to merge with another firm outside, you want to be able to retain that combined entity, so you need a clearly articulated value proposition," Sacks explained. "You hope the firm in the merger can convince [the other firm] it's in their best interest, because of international reach or service or practice areas. We've had it before, where we've retained firms, and other situations where they merged and the larger firm left the association."

In those scenarios, MSNA also touts its friendly culture, according to DeFelice. "The other thing we like to encourage, is keeping it in the family. If a firm is looking to merge with someone, we encourage them to talk to Moore Stephens member firms. Every group you belong to has a culture. We're very fraternal ... we bust each other's chops, but our firms are friends."

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