Firm M&A is still hot and heavy, but making it work remains tricky

If you thought this year was big for mergers, brace yourself - there's more to come.

Top consultants say that the accounting profession is in the midst of a merger frenzy that could well continue for the next three years.

Most mergers over the past several years occurred because firms were looking for new talent and lucrative client niches, according to Joel Sinkin, president of Accounting Transition Advisors in New York.

Now, with the economic downturn and the wave of layoffs that hit during the spring, mergers are emerging for additional reasons as well. "I have firms considering succession deals because they can use the clients, too," Sinkin said. "Now you can get the staff to get the work done. It's much more intriguing to them to pick up business, not just people, and that's a big stimulator to the marketplace."

Sinkin said that his company has seen 25 percent more merger activity this year than last.

A flurry of recent mergers has already stimulated the marketplace. New York-based Marcum has plans to merge with Margolis & Co. - a 70-person CPA firm based in the Philadelphia area - after merging with Miami-based Rachlin LLP in May. Meanwhile, Bay-area firms Greenstein Rogoff Olsen & Co. and Ronald G. Boyer Accountancy Corp. merged in August, bringing Boyer's four-person team to GROCO's Danville, Calif., office.

Consulting concern LECG announced its plans to merge with Smart Business Advisory & Consulting in August as well, sharing the strengths of each organization's niches. The fate of Smart & Associates, which had operated in an alternative practice structure with Smart Business Advisory & Consulting, has yet to be determined.

"The whole structure currently is being looked at; nothing has been determined by this point in time," said a representative from Smart regarding the future of the attest firm. "They are not going to walk away from their business. You can't separate Smart & Associates from Smart Business Advisory & Consulting. The whole transaction will be resolved in the fourth quarter."

"[The LECG-Smart merger] is the first of its kind where you are really taking an investigative and forensic group and combining it with an accounting, tax and consulting group," said Allan Koltin, president and chief executive of PDI Global in Chicago. "On paper, I think it's a wonderful strategy."

A Northeastern mega-firm was born when regional practices Parente Randolph and Beard Miller Co. revealed in September their plans to merge later this year. The combined firms will include 172 partners and more than 1,200 staff throughout Pennsylvania, New York, New Jersey, Maryland, Delaware and Texas.

More recently, super-regional firm J.H. Cohn combined services with Charles Brucia & Co., a New York-based CPA practice that serves the television, motion picture and music production industries.

WAIT, THERE'S MORE!

Still, experts in the middle of sealing these deals say more are coming.

"The motivation right now is primarily top-line growth and quality human capital," explained consultant Jay Nisberg, president of Jay Nisberg & Associates in Ridgefield, Conn. "It's finding some expertise and building expertise by acquiring it. They are looking for niche services, but they are also aggressively looking for top-line growth."

Koltin pointed to three factors behind the recent rash of accounting mergers. First and foremost is the succession-planning crisis hitting the profession as more and more Baby Boomers get ready to retire. "Most retirement-minded partners either don't have the B-team or the next generation of partners that they feel comfortable to carry on the firm and pay their retirement benefits," he said. "That's probably the overriding factor of why next year there will be a lot of mergers and probably why in the last five years it's been that way. The trend will not reverse itself for another five years."

Koltin also said that most acquirers during the fourth quarter of 2008 and first quarter of 2009 "cooled their jets" in aggressively looking for additional mergers. He predicted a healthy number of fourth-quarter unions gearing up.

"Most of the T100 firms were internally focused, dealing with the hemorrhaging due to the recession and the drop-off in the economy, so they were much more focused on staff layoffs and their earnings flattened out a bit," he explained. "Now, they are beginning to re-act­ivate their M&A strategies much more actively."

As for acquirees, they too became internally focused as a result of their performance not being as strong in previous years, and used 2009 to rebuild their profitability.

"What you have emerging is the economy stabilizing, acquirers refocused on M&A and acquirees in a better state financially to sell or merge upstream," Koltin said.

RECENT ANNULMENTS

Though more and more marriages between firms have taken place within the profession, a few divorces have popped up as well.

McGladrey & Pullen announced its attention to eliminate its relationship with H&R Block. M&P, which offered attest and audit services, operated under an alternative practice structure arrangement with Block subsidiary RSM McGladrey. RSM provided accounting and tax services.

"A deal can fall apart from how two people part their hair," quipped Sinkin.

And despite Tidwell DeWitt being acquired just two years ago by Reznick, Barry Tidwell spun out of that arrangement, taking the Birmingham, Ala., office with him to form the Tidwell Group in August. All 25 employees of the former Reznick office, including four partners, have joined the new firm. As a result, Reznick will not have a presence in the Birmingham market, according to Tidwell.

The departure, however, was described as amicable and occurred because the firms decided the culture of the clients each wanted to focus on were too different in size. They ultimately decided together that the firms would be more successful apart, Tidwell explained.

"[The split] was impacted by the clients we wanted to serve, the various resources on both sides and where they needed to be focused," Tidwell said, adding that the two firms will continue to work together on projects. "If we hadn't, we wouldn't be able to part friends."

Tidwell agreed that there's a increasing merger trend, but stressed the importance of taking a hard look at culture and compatibility of client bases before jumping in.

"Regardless of what a business model looks like, those two elements have to be considered," he said. "Not that we didn't, because we did. We are in an unprecedented time in our economy that is going to impact everyone. Firms looking to merge to consolidate costs is probably not a great decision. Firms looking to merge to continue to gain resources and gain the ability to service other areas, those can be successful, but they have to have the committed culture and the resources committed to that."

Nisberg, too, sees 2010 as a huge year for mergers - but he cautioned that firms of all sizes will be much more selective in choosing their merger partners.

"I think you're going to see a significant amount of due diligence in merger activity, especially as it relates to culture and personality styles," Nisberg said. "Firms who start doing mergers are going to be much more careful to make sure the fabric of each firm fits. There have been some hard lessons learned when the economy started to struggle. Firms were reviewing their exit strategies for themselves and partners and they moved too quickly in many instances. You're going to see much more prudent deliberations."

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

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