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Accounting Firms Drop Merger Plans

February 13, 1998

NEW YORK (AP) _ KPMG Peat Marwick and Ernst & Young said Friday they have scrapped plans to merge and become the world’s biggest accounting firm, citing reviews by antitrust regulators concerned about reduced competition in the industry.

But some industry experts were skeptical of the reason given by the two firms, and suggested that a culture clash as well as opposition to the deal from their foreign partners _ who felt they had less to gain _ doomed the marriage.

The deal, coupled with a pending merger between Coopers & Lybrand and Price Waterhouse, would have cut the Big six accounting firms down to four. The deals worried antitrust watchdogs in several countries because just two firms would have wound up with auditing responsibilities for more than half of the U.S. publicly traded companies.

The KPMG-Ernst & Young deal was under scrutiny by regulators in the United States, Europe, Japan, Australia, Canada and Switzerland. And opposition to the merger has been mounting. Just last week, the European Union extended its investigation of the deal, which was announced in late October.

The two companies said they scuttled the merger because the reviews by regulators ``would have taken many months, incurring considerable costs and potentially considerable disruption to client service.″ Not to mention, the possibility of different decisions by the various countries.

``The regulatory issues, together with the costs and resources required to merge the cultures of the two firms, have made the proposed merger impractical,″ the companies said in a joint statement. The deal would have created a company with annual revenues of $18 billion, ranking it No. 1 ahead of a combined Coopers & Lybrand and Price Waterhouse with $13 billion.

Industry observers noted that since the merger was announced, only the U.S. partners of the two firms have voted for it _ suggesting that their overseas colleagues had delayed their vote because they were unwilling to jump on board.

``They didn’t see benefit enough for themselves to join in on this,″ said Arthur W. Bowman, editor of Bowman’s Accounting Report, an industry newsletter in Atlanta. ``They couldn’t get all the egos around the world to agree to compromise.″

Bowman said that regulators most likely would have approved the deal with some restrictions. He said it also was difficult to believe the two accounting firms, which advise other companies on mergers, didn’t consider the costs and other problems from regulatory reviews when they entered the deal.

Meanwhile, Coopers & Lybrand and Price Waterhouse issued a joint statement, saying that their merger was on track and they believe it will win approval from regulators.

``We knew that the regulatory process would be a long and arduous one,″ the statement said. ``We are prepared to work with the regulators to get our merger approved.″

The accounting giants were rushing to combine their businesses to attract clients by having a bigger global presence and more comprehensive services. As their corporate clients merge or expand worldwide, the companies felt they would be in a position to serve them better with greater reach and expertise.

But regulators were concerned that a consolidation of four of the top six accounting firms, creating two firms that wield megapower, could damage competition in the industry and undermine the integrity of the independent auditors, who review corporate financial statements.

A KPMG-Ernst & Young marriage combined with the Coopers & Lybrand and Price Waterhouse deal, which was announced in September, worried regulators and others because the four firms audit more than half of the 11,600 publicly traded U.S companies and 88 of Britain’s Financial Times-Stock Exchange 100.

In extending its antitrust investigation earlier this month, European Union watchdogs said in a statement at the time that the combination of the giant firms ``could lead to high market shares″ in several of the group’s 15 member nations.

Even more significant, the combined companies would have been dominant auditors in some industries, narrowing those companies choices to one or two firms. Industry statistics showed that the merged companies would have audited 74 of the 100 top health care companies. The firms could have cornered some industries if their clients felt the remaining firms lacked expertise.

Some corporate competitors also could have found themselves in an embarrassing position of having the same firms as their auditors, a dilemma that could have caused them considerable fees if they were forced to switch to another company that wasn’t familiar with their business. For example, Coca-Cola, an Ernst & Young client and PepsiCo, a KPMG client, would have found themselves with the same auditors.

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