MERGER OF ACCOUNTING FIRMS : Joint Account : Leventhal Agrees to Be Acquired by Ernst & Young
Kenneth Leventhal & Co., a boutique accounting firm in Century City that is one of the nation’s best-known workout specialists in commercial real estate, announced Monday that it has agreed to merge with Ernst & Young, the New York accounting giant.
The merger, to be completed on June 1, is expected to allow Leventhal to become a global force in real estate. Founded 46 years ago in a two-bedroom apartment in Los Angeles, Leventhal will now operate as a unit within Ernst & Young, the nation’s second-largest accounting firm.
The merger should allow Leventhal to add Fortune 500 companies to its current client list of home builders and developers and expand into overseas markets, especially Japan and China, according to Stan Ross, the firm’s managing partner.
“It’s a different world now and this merger allows us to compete more effectively in this new real estate market,” Ross said in a telephone interview. “The California market is going through all new sorts of levels of activity and capital infusion. With our merger, we can better bring access to that capital to California.”
Although financial terms of the deal were not disclosed, the new operation will be headed by Ross, who will report directly to Ernst & Young Chairman Philip A. Laskawy. The operation will be known as E&Y; Kenneth Leventhal Real Estate Group and have estimated annual revenue of $300 million.
According to Ross, Leventhal partners will receive an undisclosed stake in the new firm. No cash or exchange of stock will be involved in the merger.
Analysts and competitors said the merger would create a real estate division second only in size to Arthur Andersen’s real estate operation. The merger comes at a time when Leventhal’s core business--restructuring troubled real estate portfolios for the federal government--is drying up.
Ross said that no layoffs are planned at the firm, which is now the nation’s 10th-largest accounting firm and has 65 partners who typically make between $400,000 and $500,000 a year, and 1,000 employees in 13 offices across the country.
“We will be hiring and expanding, especially here in our Los Angeles office,” he said.
Ernst & Young reportedly approached Ross about the merger and, after extensive discussions, the deal was unanimously approved by the company’s partners Sunday afternoon.
The merger is expected to be a tax-free transaction, whereby Ernst will absorb all of Leventhal’s assets and liabilities and the Leventhal partners become Ernst partners, according to Milton Hyman, a partner at Irell & Manella, which worked on the deal.
The combined forces of the two firms will make it tough for other large accounting firms to compete for business in the real estate market, said Tom Cleveland, president of the California Society of Certified Public Accountants, a statewide trade group based in Redwood City.
“This is a good move for Leventhal,” Cleveland said. “They have a cyclical business and that should wrap up well with Ernst & Young, which doesn’t. In order for Leventhal to grow, they needed a partner. And Ernst & Young is perfect.”
The giant accounting firm was formed in 1989 when Ernst & Whinney and Arthur Young & Co. joined forces during a merger wave that swept through the accounting industry, reducing what was then known as accounting’s “Big Eight” to only six. Now retired, Kenneth Leventhal, a UCLA graduate, started the company in 1949 with his wife in their home. He decided to specialize in real estate and in 1961 recruited Ross, a native New Yorker and real estate whiz as his right-hand man.
“I think it is a marvelous opportunity for us and for them,” said Leventhal, now 74, who retired in 1994. “We’re going to teach them how to do (real estate).”
The firm survived the ups and downs of the Southern California real estate industry, helping to build some of the larger local home builders. During the real estate downturn, the firm created a niche business, specializing in restructuring assets for troubled savings and loans taken over by the Resolution Trust Corp.
Competitors at other firms said the merged entity was a good move for Leventhal, a firm especially vulnerable to changes in the real estate industry.
Mark Coleman, director of the real estate group for Deloitte & Touche in Newport Beach, said: “They are a one-dimensional firm in an industry that’s struggling. This gives them some security.”
Still, Coleman said the different corporate cultures at the firms could create problems. “Ernst & Young is taking a huge chance here. The culture issues are enormous. At Leventhal, they have a group of fiercely independent people,” Coleman said. “That’s the biggest gamble.”
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Audit the Partners THE TOP 10 Top 10 accounting firms, based on U.S. revenue:
1994 U.S. revenue Number of Net income Firm (billions of dollars) partners per partner* Arthur Andersen $3.30 1,466 $409,600 Ernst & Young 2.50 259,900 Deloitte & Touche 2.20 1,430 296,300 KPMG Peat Marwick 1.90 1,478 255,500 Coopers & Lybrand 1.80 1,197 263,700 Price Waterhouse 1.60 931 379,100 Grant Thornton 0.23 280 200,400 McGladrey & Pullen 0.21 374 184,400 BDO Seidman 0.20 240 217,800 Kenneth Leventhal & Co. 0.20 65 988,700
* Based on earning estimates by Bowman’s Accounting Report. Because all companies listed are privately held, no official earnings information is available.
THE COMPANIES AT A GLANCE Ernst & Young Co. * Headquarters: New York * Chairman: Philip A. Laskawy * Employees: 66,000 in 100 countries * Major services: Accounting, auditing, taxes and other consulting * 1994 revenue: $2.5 billion U.S.; $6.0 billion worldwide
Kenneth Leventhal & Co. * Headquarters: Century City * Managing Director: Stan Ross * Employees: 1,000, in 13 offices * Major services: Real estate consulting and accounting * 1994 revenue: $195 million
Sources: Bowman’s Accounting Report, Times reports. Researched by JENNIFER OLDHAM / Los Angeles Times
