Whenever two firms of any size merge, it's more or less inevitable that one of the parties to the combination -- or sometimes both -- will say, "Of course, we're not looking to be one of the Big Four."
This is probably wise, because right now none of them have a chance.
Please note that this is not a judgment: It's just math. Consider the following calculations: On our Top 100 Firms list this year, the Big Four recorded a total of $33.64 billion in revenue, for an average size of $8.41 billion. The other 96 firms clock in at a combined $12.2 billion - which means that, even if you give a generous allowance for the fact that the Big Four report gross revenues and everyone else reports net, you'd still be lucky to create even two more firms of comparable size. Even if you just want to match the smallest of the Big Four, KPMG, which comes in at an eye-watering $5.361 billion, you still only get three new firms -- and that's only if you combine every single other member of the Top 100.
Let's put it another way: The gap between KPMG and the next biggest firm, McGladrey, is almost $4 billion. McGladrey, mind you, is enormous, with over a billion in revenue, but even if you combined it with the next biggest firm (and the only other one in billion-dollar territory), Grant Thornton, the two would add up to less than half of KPMG.
Either way, the fact should be clear that no firm is likely to compete with the Big Four in terms of size anytime soon.
But what if we stop thinking in terms of the Big Four?
After all, they were once the Big Five, and before that they were the Big Six, and before that the Big Eight, and before that -- well, before that, there was no group of large, dominant firms with a catchy name. The Big Eight emerged from a round of mergers among what we would probably now describe as midsized firms.
It's not hard to imagine a similar process going on now, particularly if, instead of shooting for Big Four size, the combining firms were aiming for billion-dollar status, to get into the tier that McGladrey and GT now occupy.
Here the math is a little easier: If you just take our Top 20 Firms and strip out the top six, you have $4.2 billion in revenue -- enough to make four firms on par with McGladrey and GT. And it's not just the math that makes it easy; geography helps, too. Imagine a major regional firm from the Southeast hooking up with a big player from New York, or a couple of the big firms in the Great Lakes region branching out to the east, or the west, or the south.
Suddenly, you find there are a number of configurations that give you a Big 10 roster of firms with over a billion in revenue. Throw in the rest of the Top 100 for merger fodder and continue the ongoing drumbeat of major firm combinations, and it's easy to imagine some of these scenarios playing out in the next five years or so, giving you the Big Four and six billion-dollar firms.
And once that happens, then you can start imagining how those billion-dollar firms might start merging -- and a new member of the Big Four doesn't seem so far off.
These are only back-of-the-cocktail-napkin calculations (we would have done a back-of-the-envelope calculations, but who has envelopes in these days of e-mail?), of little practical value -- except to say that maybe looking to be the next Big Four firm isn't beyond the realm of possibility.
It may just take a few extra steps.
