Ernst & Young, KPMG Mulling a Merger

Ernst & Young and KPMG Peat Marwick are expected to announce as early as today a merger that would form the world’s largest accounting and consulting firm, people familiar with the discussions said.

KPMG and Ernst & Young, which had combined revenue of $15.3 billion in 1996, are negotiating as a wave of mergers sweeps the financial services industry. Banks, brokers, insurers and accountants are trying to boost profits and slash expenses by combining.

The merger would place Ernst & Young, with 5,500 partners worldwide, and KPMG, with 6,320 partners, ahead of industry leader Andersen Worldwide in terms of both revenue and partners.

It would also vault the two above the company being formed in the merger of Price Waterhouse and Coopers & Lybrand, announced last month. If both mergers take place, the so-called Big Six accounting firms would be whittled down to four.

“It’s become clear that size matters, and if you aren’t at the top of the heap, you are an also-ran,” said Rick Telberg, editor of Accounting Today, an industry publication.

“We are in contact with another firm and anticipate making an announcement early next week,” KPMG spokesman George Ledwith said on Friday. He declined to say what the talks are about. Both companies declined to comment on a potential merger.

Analysts said Philip Laskawy, chairman and chief executive of New York-based Ernst & Young, would most likely run the combined firm because Ernst & Young has a greater presence in the U.S. and is more profitable. It had revenue of $7.8 billion last year with fewer partners. KPMG, headed by Stephen Butler, posted revenue of $7.5 billion, according to Arthur Bowman, editor of Bowman’s Accounting Report in Atlanta.

The combined firm will likely be called KPMG Ernst & Young, however, because KPMG has greater name recognition internationally, said Jay Nisberg, an accounting industry consultant based in Ridgefield, Conn.

The merger would require approval of the firms’ partners, who analysts expect would support such a transaction, and of regulators, including the U.S. Securities and Exchange Commission.

“The merger should sail through in the U.S.,” said Steve Sunshine, a Washington antitrust lawyer and former head of merger review at the Justice Department. “There are too many [accounting firms] in this world” for the combination to create major antitrust problems.

The combined firms would probably cut partners and staff, both through layoffs and attrition, by about 20%, Nisberg said. That’s slightly higher than in previous mergers in the accounting industry because both firms have a larger-than-average number of partners.

Some clients would also jump ship, he said.