Throughout 2009, those in the accounting professionneeded a scorecard to track the flurry of CPA firm mergers that occurred between the start of the year and the final refrain of "Auld Lange Syne."
Firms such as Sikich, Citrin Cooperman, Cherry Bekaert & Holland, Friedman, Daszkal Bolton and Marcum were among the long roster of firms that completed notable 2009 unions, while Baker Tilly Virchow Krause pulled off one of the year's latest and biggest marriages, merging with Washington, D.C.-based Beers & Cutler to form a 1,400-member powerhouse with combined revenues of $250 million.
And most of those involved with firm M&A expect that frenzied pace to continue in 2010. "The merger market is flooded with two types of firms - larger firms with an insatiable appetite for merging in smaller firms, and smaller firms that have a dire need to merge up within the next few years," said consultant Marc Rosenberg, CPA and principal of Wilmette, Ill.-based Rosenberg Associates. "Because there are so many players, the merger market has largely been unaffected by the recession."
Ira Rosenbloom, chief executive of New Jersey-based consultancy Optimum Strategies and former managing partner of Mintz Rosenfeld, which was acquired several years ago by Northeast super-regional firm J.H. Cohn, also expects 2010 to be a strong year for M&A. "The typical motivations of exit strategy, lack of succession, professional fatigue and market competition become even more powerful each year as the members of our profession age and the inflow of new talent lags behind."
"Organic growth is too difficult in this economy," said Terence Putney, of M&A broker Accounting Transition Advisors. "So the market for mergers has remained competitive and robust and more in favor of the seller than most forecasters predicted. That is unlikely to remain the case down the road."
PRE- AND POST-GAME CHECKLISTS
Though firms have myriad reasons for diving into M&A - succession, geographic expansion, new specialty niches and/or personnel - the processes behind a profitable and lasting union can often be painstaking, and occasionally extend out several years before both parties agree to sign on the dotted line.
Chief among the issues that have to be considered are firm cultures, and HR and IT infrastructures, as well as the target's reputation with existing and former clients across all practice areas, and its community profile.
"I've worked on deals that have been completed within 90 days, and I've been part of other deals that ultimately closed or failed after discussions as far-reaching as two years," revealed Allan Koltin, chief executive of Chicago consultancy PDI Global and one of the industry's highest-profile M&A brokers.
Koltin breaks down the merger process into three parts: social dating and compatibility, exchange of financial and operations information, and what he termed the "bottom of the ninth" or the final reality check.
"We've done so many deals that we have [the evaluation process] down," stated Joel Cooperman, managing partner at New York-based Citrin Cooperman, which in November merged in Pennsylvania-based Carrow Doyle & Associates. "Our first meeting is where we see if we like them and then decide if we want to proceed. Then if we feel there's a reason to go forward, I'll have them meet our partners without me. Then we can decide if they are age-, merger- or discipline-appropriate. We then follow that with a letter of intent and then due diligence. We look at their financials, as well as non-proprietary data like ages of partners, fees, as well as compensation, and see how they fit."
"As part of our transition checklist we have partners in charge of tax, accounting and operations and they submit reports," he continued. "Then we evaluate it again and ask if this is a go or no-go. If not, I ask under what conditions would you do this deal?"
Howard Kies, managing partner at Richmond, Va.-based Cherry Bekaert & Holland, explained that one of his firm's strategies before commencing merger talks is to speak with people in the home community of the potential acquiree.
"We were looking at a firm in Miami and we didn't know anyone in Miami, so we spoke to outside parties as well as law firms and bankers to gauge what type of reputation they had. Over the years, we have had talks with firms that didn't go past the first few meetings. Sometimes it's the culture, other times it may be something else. Perhaps you don't get the sense it will be a success or a good match. A firm's culture is not just the work environment, but the type of clients they want to serve."
Koltin of PDI said that if firm cultures are different, it's important to find out why they are different and, more important, whether one side has the ability to embrace the other firm's culture.
"I know we call it 'mergers and acquisitions,' but the reality is that there is no such thing as a merger," he said. "At the end of the day we may adopt best practices from both firms, but at some point the culture of one firm (typically the larger firm) is going to become the culture of the combined firm."
"In most cases, firms who are attracted to each other often want to do the deal so badly, they ignore or overlook the small stuff when assessing the quality of the other firm's work," said veteran accounting firm consultant Jay Nisberg. "In my experience it takes a major concern on the quality [of work] to overthrow a decision [to merge]."
Rosenbloom of Optimum Strategies advised taking a look at a firm's Web site to determine what organizations they support and are active in: "That gives you a perspective on their internal systems."
Jim Sikich, managing partner at Aurora, Ill.-based Sikich, whose firm's practice areas are about evenly divided between traditional (tax, audit) and non-traditional services (technology, investment banking, HR and marketing-related consulting), said that his firm's "sweet spot" candidates are firms doing between $2 million and $5 million, and that it is currently eyeing a nine-state radius in the Midwest, with a number of unions currently in the pipeline. Most recently, the firm merged in Decatur, Ill.-based Sleeper Disbrow Morrison Tarro & Lively.
"We have a couple of meetings to get to know each other, and after the second one, both parties more or less have to make a decision on whether to proceed," Sikich explained. "When we agree to disclose financial information, what we do is take their information from last year and show them what it would look like under our financial system. Once, we were just about at the altar and the final due diligence led us to ask additional questions and we walked away."
Nisberg recalled that on one occasion, a small firm that was being acquired by a national practice asked to perform a due diligence on the larger firm's clients. They were immediately rebuffed and the small firm walked away from the deal.
Said PDI's Koltin, "The most successful mergers seem to take place when both sides put the culture issue on the table and go through the process of talking very specifically and in detail about how they define culture and what it means to them. When this happens the probability of success goes up dramatically."
