2 Big Eight Accounting Firms to Merge; 2 Others May Join Forces Soon

Two of the nation’s largest accounting firms announced Thursday that they have agreed in principle to combine operations, and two even bigger concerns began formal merger talks.

If both deals succeed, the so-called Big Eight accounting firms would shrink to five multibillion-dollar giants in an effort to serve better their growing multinational clients in today’s global economy.

“The pressure is for bigness as marketplaces internationalize,” said Robert Crane, editor of Accounting Today. “The big, big companies are looking for their accounting firms to serve them on a worldwide basis.”

Agreeing to merge were New York-based Deloitte Haskins & Sells and Touche Ross & Co. If partners of the two firms approve the merger, the new entity will be known as Deloitte & Touche, with 1989 revenue exceeding $4 billion and more than 65,000 employees worldwide, the companies said in a joint statement. In terms of 1988 revenue, Deloitte & Touche would rank fourth in the United States and fourth worldwide.

Meanwhile, an even bigger combination is afoot as the nation’s No. 1 firm, Arthur Andersen & Co., and Price Waterhouse & Co. announced formal merger negotiations. Combined, they would create a global powerhouse with $5 billion in revenue. That would be nearly $1 billion larger than its closest rival, Ernst & Young, the result of the recently announced merger of two other Big Eight firms, Ernst & Whinney and Arthur Young.

Ernst & Young is expected to begin operations Oct. 1, pending approval by overseas partners. However, the Arthur Andersen-Price Waterhouse negotiations may well prove thorny, said Crane of Accounting Today. “They are taking only the first step in an unlikely trip,” he said. “The philosophies and cultures of these companies are in direct contradiction, and they will have a whale of a tough time finding common ground.”

According to the Deloitte and Touche announcement, J. Michael Cook, currently chief executive of Deloitte Haskins, would become chairman and head of U.S. operations. Edward A. Kangas, Touche’s chief executive, would become chief executive of the international organization and managing partner of the domestic firm.

In stressing global markets, Cook noted that “The continuing growth of the Pacific Rim . . . requires a strong service capability in key Asian markets.” The international unit of the merged entity includes Tohmatsu Awoki & Sanwa, a leading Japanese audit firm and longtime member of Touche Ross International.

The firms Cook and Kangas now head are the smallest of the so-called Big Eight but have grown rapidly. Between 1985 and 1988, their revenue increased 88%, according to Bowman’s Accounting Report, an Atlanta-based publication. Growth last year averaged 26%, compared to 22% for their bigger brethren.

Neither firms would comment on whether any jobs would be lost in the merger, but some industry observers said support staff would likely be trimmed. But industry publisher Arthur Bowman predicted “some fallout at the partner level,” explaining: “You don’t need two partners in charge of the same little area.”

Meeting the complexities of companies dealing in markets around the world underlies much of the merger mania among the giants of accounting and consulting since the joining two years ago of Klynvel Main Goerdeler with Peat Marwick International, now KMG Peat Marwick, second in U.S. revenue and the world leader with $3.9 billion in 1988 revenue.

Global developments were among the reasons cited on Thursday, too, by the heads of Arthur Andersen and Price Waterhouse in announcing their merger negotiations and pledging themselves to confidentiality for the next 60 days.

“These developments,” the companies said, “are creating a demand for increased worldwide professional and financial resources with which to serve clients’ needs.”

With six accounting firms possibly pairing off this year, only Coopers & Lybrand--something of an industry loner--would sit out the current merger activity among the Big Eight. The phrase refers to the eight worldwide firms that provide accounting, auditing, tax and consulting services to about 75% of all public companies in the United States.

“This group will merge themselves down to five or four players,” said James Emerson, publisher of The Big Eight, a monthly magazine based in Bellevue, Wash. “The second tier (of smaller firms) will probably start merging, too, but for the moment they get something of a breather.”

The most likely merger in that second tier, Emerson said, appear to be Spicer Oppenheim in New York, with about $344 million in revenue, and Pannell Kerr Forster in Houston, with $317 million in 1988 revenue.

FROM THE BIG EIGHT TO THE BIG FIVE

The three pending or proposed mergers in the accounting industry would compress the list of firms known as the Big Eight.

The Big Eight

Firm World revenue (billions) KPMG Peat Marwick $3.9 Arthur Andersen 2.8 Coopers & Lybrand 2.5 Price Waterhouse 2.2 Ernst & Whinney 2.2 Arthur Young 2.1 Deloitte Haskins & Sells 1.9 Touche Ross 1.8

The Big Five?

Firm World revenue (billions) Andersen-Waterhouse $5.0 Ernst & Young 4.3 KPMG Peat Marwick 3.9 Deloitte Haskins Sells-Touche Ross 3.8 Coopers & Lybrand 2.5

THE BIGGEST ACCOUNTING FIRMS Ranking is based on the firms’ fiscal 1988 revenue from U.S. operations, as compiled by Bowman’s Accounting Report of Atlanta. The list assumes completion of the merger announced in May of Ernst & Whinney with Arthur Young & Co., formerly third and sixth, respectively. On Thursday, Deloitte Haskins & Sells and Touche Ross announced an agreement in principle to merge. Separately, Arthur Andersen and Price Waterhouse disclosed that they have begun formal merger talks.

1988 U.S. International Rank Accounting firm Revenue Revenue 1 Ernst & Young $2.0 billion $4.3 billion 2 Arthur Andersen $1.71 billion $2.82 billion 3 KPMG (Peat Marwick $1.64 billion $3.90 billion Main & Co.) 4 Coopers & Lybrand* $1.14 billion $2.50 billion 5 Price Waterhouse $960 million $2.20 billion 6 Deloitte Haskins & Sells $820 million $1.92 billion 7 Touche Ross $796 million $1.84 billion 8 Laventhol & Horwath $306 million $556 million 9 Grant Thornton $200 million $721 million 10 BDO Seidman $157 million $758 million 11 McGladrey & Pullen $139 million $402 million 12 Kenneth Leventhal $126 million $292 million 13 Pannell Kerr Forster $87 million $317 million 14 Spicer & Oppenheim $70 million $344 million

* Estimate

Source: Associated Press