KPMG, Ernst & Young Cancel Proposed Merger

KPMG Peat Marwick and Ernst & Young said Friday that they canceled plans to merge and create the world’s largest accounting and consulting firm, acknowledging that regulatory hurdles got in the way.

The cancellation comes a week after the European Commission began an extended antitrust probe of the proposed merger, which would have created a firm with sales of $18.1 billion.

“The regulatory thing was turning into a complete nightmare,” said a senior partner at Ernst & Young, who declined to be named. “When you added it all up, it was just going to take a lot of time, a lot of money and a lot of blood, sweat and tears.”

EC Commissioner Karel Van Miert raised concern that the combination--plus the planned merger of Coopers & Lybrand and Price Waterhouse--would have left businesses with too few choices of accountants. The two transactions would have whittled the so-called Big Six accounting firms to the Big Four.

Analysts said clients and partners of KPMG and Ernst & Young also were worried about conflicts of interest in combining the two firms’ client lists. In many cases, they work for direct competitors. For example, KPMG is the accountant for PepsiCo Inc., and Ernst is the accountant for Coca-Cola Co.

“The real reason it fell apart is there was too much fallout from clients,” said Jay Nisberg, an independent accounting consultant in Ridgefield, Conn.

Some partners of KPMG outside the U.S., who hadn’t yet voted on the merger, felt the transaction was foisted on them, analysts said. The combined firm would have had 12,800 partners and 163,250 employees in 135 countries.

Critics within the firms complained that the arrangement was ill-conceived because it was thrown together in less than a month in reaction to the Coopers and Price Waterhouse plan.