Industry gurus predict merger & acquisition frenzy for the coming year
by Stuart Kahan
Buckle your seatbelt.
That’s the advice of industry watchers who are anticipating a NASCAR-like pace with regard to industry mergers in 2004.
“If there is ever such a thing as a sure prediction in the accounting industry, it would be that mergers in 2004 would heat up to a frenzied pace,” said industry consultant Marc Rosenberg, president of The Rosenberg Associates, in Wilmette, Ill. “This frenzy will happen at two levels: the large regionals and small and medium local firms.”
According to Rosenberg, the large regionals’ appetites for mergers is almost insatiable. “These are, by and large, very profitable, well-managed companies that know how to bring in moderately successful smaller local firms and mold them into their own image,” he said. Rosenberg pointed out that small and midsized local CPA firms typically tap into only about one-third of their profitability potential due to inadequate management and vision. “The larger regionals are more than willing to take on a firm that has something to work with and, like a piece of clay, mold them into something different.”
As evidence of that trend toward unions between large regional firms, effective the first of the year, Dixon Odom and Crisp Hughes Evans had merged to become the new Dixon Hughes PLLC, with total revenues of nearly $95 million and a staff of over 725 in 24 cities in eight states. It is now the largest CPA firm in the Southeast. Dixon Odom’s executive member, Eddie Sams, and Crisp Hughes Evans managing partner Ken Hughes share the leadership of the new entity.
“Our practice structures complement each other remarkably well by strategically rounding out our geographic footprint and bringing more resources to our clients,” said Hughes.
Added Sams, “Our goal in combining the firms is to become even better, not just bigger. By combining resources and similar cultures, we are creating even greater opportunities — for the firm, our staff and our clients.”
Cutting a wide swath
Allan Koltin, president and chief executive of Chicago-based PDI Global, said that, in his opinion, the biggest activity will involve mergers with firms in the $4 million-to-$15 million range. In fact, at press time, a number of firms in that revenue arena were in merger discussions. The only question for them seems to be, do they merge with a comparable firm or go upstream to a larger one?
“With the Big Five becoming the Big Four, it has had a trickle-down effect to even regional and local firms as larger, private and, to a lesser degree, smaller public companies are no longer being served by the Big Four,” said Koltin. “This has created somewhat of a vacant landscape for local and regional firms to attack. To do this, however, they are finding that they also need to be bigger, in size as well as depth and resources.” As evidence, Koltin pointed to last year’s merger of New Jersey-based firms J.H. Cohn and the Videre Group.
Rosenberg opined that the small and midsized firm merger fever is being triggered by a huge endemic problem for firms in this size range: succession planning. In fact, he said that 50 percent of the partners at these firms are over 50 years of age. “Tension and uncertainty over the feasibility of the firm’s retirement plan actually paying out to retiring partners, is rising. Worse, they look at their staff and don’t see them having the right stuff, the willingness and the ability to become a partner and eventually buy out the older partners.”
In his own practice, Rosenberg noted that virtually every small and midsized firm is interested in merging with a smaller practice. “Whereas, a few years ago, when I talked to firms about merging into a smaller practice, their attitude was: ‘We’ll respond if someone comes our way.’ But they stopped short of being proactive.”
Actually, he added, it used to be that only a handful of the top 100 firms in the country were aggressively pursuing mergers, “but now, it seems every one of them is active in the merger market.”
Rita Keller, director at Brady Ware CPAs, in Dayton, Ohio, said that there will be significant activity in M&A at accounting firms. “The issues facing firms will keep on putting pressure on smaller, and not so small, firms to keep up — in the area of technology, marketing, and especially competing for good people. The No. 1 issue continues to be the people challenge.”
She also felt that becoming a digital firm with top-notch mentoring and orientation programs, and marketing and selling to larger clients, all combined, will be more than some firms will want to face alone. “Considering the time and expense involved — plus the internal resources to devote to these types of issues — merging with another firm certainly looks more attractive than it has been in the past.”
Rosenberg said that the merger market in all industries is typified by there being more willing buyers than sellers, and the CPA firm merger market is as good an illustration of this as any. “It’s very difficult to find a smaller firm to merge in. Small and medium CPA firms with succession planning problems almost always elect to first pursue the strategy of merging in smaller practices or making lateral hires of managers from larger firms to find future partners. But many firms are unable to find this type of merger partner and, eventually, must resort to the strategy they had hoped to avoid — merging upstream into a larger firm.”
Changing landscape
According to Robert Gallagher, a CPA and merger consultant in Pittsburgh, the “knowledge-based firms” will continue to gain market share.
“As in every business, M&A should be part of each firm’s expansion strategy. The Dixon Odom and Crisp Hughes Evans merger in the Southeast will provide them with a large platform to acquire other niche firms in that major market,” he said. “Also, I believe that the Northeast, especially New England, will have a merger of two large firms in 2004. Once this happens, that firm will probably acquire others in the region. The Midwest already has many large firms. Grant Thornton will continue to build their firms via mergers in selected states such as California, as well as expanding their larger presence in an area such as Charlotte, N.C. Texas is a huge state and the Southwest will have much merger activity as firms will look to build critical mass and competitive advantage.”
Gallagher also predicted that larger firms, particularly in the $10-million-plus range, will continue to acquire niche practices in cities where they don’t have a presence, and that location will serve as a platform to grow the various niches.
What will be the surprises? “I wouldn’t be shocked if 2004 results in a merger of top 20 firms,” concluded Gallagher. “It is fair to predict that five to 10 top 50 firms will not be in existence as separate entities during the next 10 years.”
