Horwath Sydney to merge with Deloitte – a comment on the profession

I was fascinated to read in today’s news that Deloitte has struck a merger deal with Horwath Sydney so that Horwath Sydney will become a large part of Deloitte’s ‘Growth Solutions’ – which is their ‘middle market practice’. I am fascinated on several levels by this.

Firstly, as of 1 July I became a Director in BDO Kendalls’ Growth Services Consulting area (I still focus on issues in the management of information systems), where we consult to exactly this middle market, from small startup companies through to corporate listed companies (from Deloitte’s perspective, we probably go from really quite small to really quite large, whereas they go from the biggest of the big to really who would want to be that small anyway? :=) ). So Deloitte is turning up the heat on what should be our market niche (ironically, I think it’s hard for them to deal with that market, but clearly they don’t think that way).

Secondly, I used to work for Horwath Brisbane before the Brisbane office merged to create the uber-professional services firm that is BDO Kendalls – in our market, we are bigger than Deloitte, and the merger did some wonderful things for our local market. Not that a big accounting firm in Brisbane is remotely like, say, a big accounting firm in London or Hong Kong. But anyway, as a result of my previous experience, I know many of the people in the Horwath Sydney firm (not that, for obvious reasons, we have been all that close for some time). And Horwath Sydney was always a firm that was focussed on its growth as a practice. For Horwath Australia, the eastern seaboard was always traditionally the strongest part of the practice (Melbourne, Sydney, Brisbane), but this has probably changed since the merger. Anyway, I have a little insight into Horwath Australia.

Thirdly, when Andersens collapsed a few years ago, the conventional wisdom was that a second-tier firm would arise like the sword held by the lady of the lake, and become part of a new ‘Big 5’. Four big accounting firms is just too small in Australia, or the world. They are too often conflicted out of their engagements. For instance, let’s assume a government is undertaking a hypothetical infrastructure sale, and is selling off this business to every big player in town. Each of the big four firms want their stake in advising the purchasers – there’s more fees in it – but of course no purchaser wants to receive the consulting advice of a firm that is advising a competitor, and often for this size sale the ‘big players’ only want advice from a ‘big’ accounting firm. Instantly, you can only really have four serious potential purchasers (this is a little simplistic, but I think essentially correct). Now, of course, this leaves the Queensland government in the lurch – who will act as probity auditors over the sale process? None of the big four can do it as they’re working for the potential purchasers (last time I checked, this was kind of a probity problem). The point is, the wisdom is that four is too small, so a fifth player should emerge in the marketplace. It has been four years now, and it hasn’t happened. Which leads me to my fourth point.

Fourthly, the BDO Australia network did its darndest to create a merger with PKF Australia, but in the end it did not come off. This is a well publicised and discussed fact, particularly quite frankly by PKF Australia :=).

Fifthly, Deloitte recently acquired the Melbourne practice within the BDO Australia federation, so we have only recently felt the pain that Horwath is now feeling having lost Horwath Sydney from its practice (not that I know much of the details). I believe we are still looking for a Melbourne suitor to take our hand in marriage (not that I would have any inside information, and if I did I wouldn’t be silly enough to blog about it).

So, those five points – where am I headed?

A little crystal ball-gazing firstly. Firstly, without Horwath Sydney, there’ll be a hole in the national Horwath network, just like there was when we lost BDO Melbourne. A key difference between Horwath and BDO though, in my humble opinion, is that our network has been relatively stable. Horwath has now lost its Adelaide, Brisbane, and Sydney offices within four years, I believe, and in the Brisbane and Sydney cases the managing director of Horwath Australia has been involved in both cases. Horwath Melbourne is very strong, but do they have the energy to rebuild the Horwath network?

The next question, though, is an interesting professional one. I really wonder whether we will ever see the much-touted Big 5 emerge. It needs a ballsy bit of merging to make a real difference. To date it has been mid-tier merging with Big 4 (doesn’t help matters e.g. BDO Melbourne to Deloitte) or one firm jumping from one mid-tier network to another (e.g. Horwath Brisbane to BDO Kendalls). In the latter case, since everyone plays musical chairs, what a network gains on the swings it loses on the roundabouts.

To really make it happen, and to get through this bottleneck in our economy (I know some might disagree or not even consider it, but accountants are needed if you’re going to realise synergies from business), you need one network to completely merge with another, which is what BDO Australia tried to do with PKF Australia. And from what I hear at other firms around town and across the country, these sorts of mergers all tend to founder on the rocks of narrow self-interest (best advice I ever heard: if there’s a horse called Self Interest running in a race, bet on it because self-interest always wins).

Partners may recognise that the merger is good for the practice, good for the profession, good for their staff, but if it takes them out of their comfort zone, earns them less, affects their equity or ‘superannuation’ in the practice, increases their risks, or something that they don’t want to see, the merger will founder. We accountants are a risk-averse bunch :=). For a national merger – particularly between federated networks – you just need one or two firms to hold out seeking a better deal and the entire merger collapses.

And meanwhile, the Big Four charge more for their services, pick off mid-tier firms as soon as they get big enough to be a threat (or, as rumour has it, start poaching their staff, although they’ve never given me a phone call!), and the bottleneck gets bigger, and the overall profession suffers. On the flip side, of course, who can blame partners for taking an offer of cash, to realise some of their investment in the business. Accounting’s a harsh game, a hard game, and a poor paymistress, really, for the risks these partners take – every time they sign a letter they could lose their house. From what I understand, motor dealers are better paid, get to drive flashier cars, and usually didn’t spend seven years of their lives studying (hands up everyone who thinks the accountants are smart? Cos you’re wrong).

I just despair a little though – where’s the profession going and are we ever going to see a Big 5? Perhaps PKF is best placed as they have been touting their new national ownership model, so once they have a national vote they can actually make a binding decision – federated associations can pretty much ignore decisions they don’t like. To date though most of the merger activity has been rearranging the deckchairs on the Titanic – a potentially pleasing activity but nonetheless one bound to end in getting the cushions wet.

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