BDO and PKF in talks for audit merger deal

 
Marion Dakers
BDO and PKF are in advanced talks to merge their UK operations, the accountancy and advisory firms revealed yesterday.

A tie-up, which is expected to take place early next year, would give the group extra firepower to compete with Grant Thornton for mid-market audit and business advisory clients.

The firms said the enlarged company would have 3,500 people working across the UK, with revenues close to £400m a year. Their global arms are expected to remain separate.

Last month, Grant Thornton posted revenues of £417m and repeated its goal to reach £500m within three years.

PKF, which lists mining, social housing and the football industry among its specialisms, said the tie-up would help the companies grow in their “mid-market heartland”.

The group gave a gloomy forecast last month, posting a three per cent fall in revenues to £103m and warning the economic downturn is hampering activity in professional services.

BDO managing partner Simon Michaels was nevertheless keen to highlight growth opportunities in a statement yesterday: “Our two firms share a closely-aligned vision to lead in the mid-market, as well as similar cultures and a commitment to deliver exceptional client service.”

In the latest Morningstar rankings, Grant Thornton was the biggest auditor of Aim-listed clients with 165 mandates, followed by BDO with 130. PKF came eighth with 32.

The new group would still lag behind the Big Four – PwC, Ernst & Young, KPMG and Deloitte – who dominate audit and advisory work for Britain’s blue-chip companies.

The mid-market auditors have been among the most vocal critics of this market concentration, giving evidence to the Competition Commission’s probe into the industry, which is due to report provisional findings in the new year.

ACCOUNTANCY M&A WHY DO THE FIRMS WANT TO MERGE?

BDO is billing its tie-up talks with PKF as the first strategic merger in the accountancy industry for 15 years.

Both firms have struggled to increase turnover since the financial crisis, while bigger and more diversified groups have weathered the storm. This is a trend echoed across the professional services, most dramatically in the accounting problems at RSM Tenon that have wiped 70 per cent off the firm’s market cap in the last year.

Now accountants and auditors appear to be following law firms in looking for strength in mergers and acquisitions. There is also an opportunity for the bean counters in the form of a Competition Commission probe into the statutory audit market.

With 99 of the FTSE 100 using the Big Four firms for their audits (the remaining blue-chip, Randgold Resources, uses BDO), there is a growing clamour for more competition.

The CC’s investigation could speed up changes in the rules for auditors, forcing large companies to put audit contracts out for regular tender, or putting limits on the amount of other work auditors can do for their clients.

But the mid-cap specialists are not yet ready to challenge the Big Four in this area.

The likes of BDO and Grant Thornton do not have the expertise within their ranks to sign off the accounts of a complex multinational financial group such as Barclays, for example, which limits the work they could contest.

M&A would be a route to beefing up sector specialist teams. While BDO and PKF pride themselves on their mid-cap heartland, a tie-up shows they have one eye on the horizon.