Merger to Create World’s Biggest Accounting Firm : Parent Firms of Peat Marwick and KMG Main Hurdman Reach an Agreement; Would Surpass Arthur Andersen

After lengthy discussions, Peat Marwick International and Klynveld Main Goerdeler said Wednesday that they have reached agreement on a merger that would create the world’s largest accounting firm.

Peat Marwick’s U.S. affiliate, Peat, Marwick, Mitchell & Co., is the second-largest American accounting firm, while Klynveld Main Goerdeler’s U.S. affiliate, KMG Main Hurdman, is ranked ninth. Together they would have $2.4 billion in annual revenue, easily surpassing Arthur Andersen & Co., which last year ranked first with $1.6 billion in revenue.

Officials of the firms said they want to merge in order to give themselves more appeal to the growing number of international clients that prefer to deal with one accounting organization for all of their operations. Peat Marwick is strongest in North America and the Caribbean, where it has 16,600 of its 32,000 employees; Amsterdam-based KMG is strongest in continental Europe, where 13,400 of its 26,200 employees are located.

Grumbling Among Affiliates

While KMG recently had overtures from Arthur Andersen, seventh-ranked Deloitte, Haskins & Sells and third-ranked Ernst & Whinney, “this seemed to be the best fit, geographically and culturally,” KMG Main Hurdman Chairman John A. Thompson said in an interview.

James C. Emerson, publisher of the Big Eight Review, a newsletter in Bellevue, Wash., said the merger might also have been spurred by KMG affiliates, who have been unhappy with the firm’s growth since it was formed from independent accounting firms in nine countries in 1979. Some officials of Thorn Riddell, KMG’s Canadian affiliate and the largest accounting firm in that country, have grumbled about the growth, as have officials of KMG’s Japanese organization, according to Emerson.

“Some have looked around and decided they weren’t better off than before that merger,” he said, adding that he believes that the merger is “a wise move that will benefit both.”

A number of leading U.S. accounting firms have merged or considered merging in the past several years, partly out of a desire to draw clients with far-flung operations. Andersen, for example, last year merged with SGV Group, the first-ranked Asian accounting cooperative.

Deloitte, Haskins and fifth-ranked Price Waterhouse announced plans to merge in late 1984, but they dropped those plans three months later when some overseas partners resisted their loss of control.

The new U.S. firm will be named Peat Marwick Main & Co. and will be based in New York. The new international organization, based in Amsterdam, will be called Klynveld Peat Marwick Goerdeler. Larry D. Horner, chairman of Peat, Marwick, Mitchell, will be chairman and chief executive of the new American organization; Thompson will be executive vice chairman of the U.S. affiliate.

Big in Banking, S&L; Industries

Peat Marwick is considered by many to be the leading accounting firm to the banking and savings and loan industries, and it counts among its U.S. clients Citibank, Manufacturers Hanover Trust, Aetna, J. C. Penney and Xerox, said Arthur Bowman, editor of Public Accounting Report, an Atlanta-based accounting newsletter.

While KMG has lined up such U.S. clients as National Medical Enterprises, Avon and Union Carbide, “it hasn’t had enough of a distinctive personality in the United States,” Bowman said. “This merger is meant to correct that.”

While 69% of Peat Marwick’s business came from U.S. clients last year, only 24% of KMG’s revenue came from the American market in 1985, he noted.

Analysts noted that the two firms’ growth rates have recently been slightly lower than their peers’ at a time when all accounting firms have struggled to maintain growth and profitability. Bowman said Peat Marwick’s revenue grew 11% between 1984 and 1985, a lower rate than any of the other Big Eight accounting firms.

The two firms, which first began merger discussions in February, 1985, signed a memo of understanding on the proposed combination last Thursday, officials said. Local affiliates in each country will now sit down to negotiate over such matters as the names and governing structures of the new organizations.

Broke Off Talks in 1985

Such negotiations can be sticky, particularly where partners of one firm stand to lose their rank or even their partnership status. Thompson, however, predicted that the partners will approve the deal, and he said all partners of the firms will be entitled to remain partners in the new organization.

The two firms abruptly broke off talks in September, 1985, following widespread press reports about the merger talks. But a Peat Marwick spokesman, Dallas Kersey, insisted that the two firms “never stopped thinking (we’d) be good together. We were just like a man and a woman who go their separate ways for a while but always knowing they’re a good match.”

Analysts said the combination would put additional pressure on Big Eight competitors but won’t make much difference for the accounting firms’ customers.

“Fees are already pretty competitive, and I don’t think this will lower them significantly,” predicted Lee Seidler, managing director and accounting industry watcher at Bear, Stearns & Co., a New York-based investment firm. “For those on the other side of the balance sheet, this won’t make much difference.”

THE BIG EIGHT

Ranked on basis of U.S. revenue, in millions of dollars; all figures are for fiscal 1985.

U.S. Worldwide revenue revenue Arthur Andersen $1,182 $1,574 Peat, Marwick, Mitchell 1,004 1,445 Ernst & Whinney 809 1,185 Coopers & Lybrand 755 1,375 Price Waterhouse 645 1,234 Arthur Young 545 1,160 Deloitte, Haskins 528 953 & Sells Touche, Ross 513 973 And in ninth position . . . KMG Main Hurdman 234 975*

*Known internationally as Klynveld Main Goerdeler, ranked seventh worldwide.

Source: Public Accounting Report