BDO to merge with Moore Stephens

A major shake-up of the accountancy sector is underway as BDO has confirmed it is in advanced merger discussions with Moore Stephens to create an accounting firm with a particular focus on entrepreneurial, fast growing businesses and high net worth individuals, and which will overtake Grant Thornton to become the UK’s fifth largest firm 

On completion of the deal - expected spring 2019 - the combined firm will have gross annual revenue of £590m delivered by 5,000 people across the UK. The firm will take on the BDO brand, as it will remain part of the BDO network globally, which has revenues of over $8bn (£6.23bn), is ranked in fifth spot and operates in 162 countries.

Partners of both firms have voted in favour of the merger, subject to final contracts.

Paul Eagland, managing partner, BDO, said: ‘If ever there were a time for firms to turbo-charge their growth, it is now. As a combined firm, we offer greater choice, competition and scalability to the top-end of the market, and are better placed to deal with any economic disturbance from Brexit.’

The two firms are believed to have been in talks for around four months.

Eagland said: ‘It was clear from our first meeting that we share similar culture and values. As professional services firms, our people are our greatest asset and it is essential that we create an enlarged business that retains the best of our similar cultures.

‘In the last 12 months – in the wake of Carillion and the subsequent focus on competition in the audit market – the UK market now has a better appreciation of BDO’s capability and quality. This deal increases our credibility further and proves our commitment to competing in the top-end of the market.’

BDO said the combined firm will be one of the top auditors in the country based on the number of UK-listed companies it audits, while its tax and audit practices will be ‘far larger than its nearest mid-tier competitors’. 

Eagland said: ‘But we’ve always said that size isn’t a proxy for quality. A driver of this merger is one of sustainable and profitable growth that benefits our clients, people and capital markets alike.’

Both operate in very similar sectors: energy, technology, retail, real estate, financial services and more.  Moore Stephens is also strong in the shipping, insurance and donor assurance sectors.

Simon Gallagher, managing partner, Moore Stephens, said: ‘The proposed merger provides a platform for continued, sustainable growth, as well as offering something different to the market at this important time.

‘Clients are asking us to deliver an ever-increasing range and depth of solutions, provided globally. Combining with BDO makes providing that much easier.

‘Moore Stephens is a very profitable business delivering double digit growth for several years in a row. This merger will allow us to remain on that kind of trajectory.’

The proposed deal relates only to Moore Stephens LLP, consisting of the London, Birmingham, Reading, Bristol and Watford offices of the current Moore Stephens UK network. In London, BDO – with its HQ in Baker Street – plans to take on a second office in the City to accommodate the growth and retain that city-based presence for clients after the merger.

The new firm is larger than Grant Thornton, which has traditionally been viewed as the leading mid-tier contender, and reported revenues of £499m last year.

However, it is still considerably smaller than its nearest rival, KPMG, which posted revenues of £2.2bn and has around 14,000 staff and over 600 partners.

In this year’s Accountancy Network and Associations annual survey, BDO LLP was ranked in the fifth spot, with a 6.5% increase in revenue to $8.10bn. Globally, growth was spearheaded by member firms in the US, and headcount increased by 9%, with 73,854 individuals working in 1,500 offices. In April 2015, Moore Stephens merged with Chantrey Vellacott, previously ranked 20th in the Accountancy Top 75 survey. The deal was completed in May 2015.

The proposed merger comes against a background of considerable upheaval in the audit market. Earlier this year Grant Thornton announced it was making a strategic move away from tendering for statutory audit work in the FTSE 350, citing the difficulty of taking on the Big Four’s dominance in this area.

Since then, the well publicised failures of companies including BHS and Carillion, reports from the Financial Reporting Council (FRC) about a deterioration in audit quality, and concerns about the role of the Big Four have prompted inquiries scrutinising the way in which the audit market currently functions.

A review of the FRC’s operations led by Sir John Kingman is due to produce a report within the next few months. The Competition and Markets Authority (CMA) is conducting a review of the market to examine whether it is ‘competitive and resilient enough to maintain high quality standards’, while the business, energy and industrial strategy (BEIS) select committee has also announced its own inquiry into claims the audit market is ‘broken’.

Against this background, the proposed merger is likely to attention close attention from the regulatory authorities and those who want to see greater competition for top end audits.

In its response to the CMA inquiry, BDO said that companies are increasingly looking outside of the Big Four for participants in tenders, but the low success rates of ‘challenger’ firms’ indicated that ‘this provides a facade of competition only’.

BDO said the most impactful intervention would be to introduce market caps, suggesting one simple option could be as simple as stating that by 2023 no audit firm can act for more than 60 FTSE 350 audit clients. Failure to comply would result in censure and / or fines based upon the additional fees secured.

The firm stated: ‘The companies yielded by the Big Four should not be overly weighted with smaller entities for example investment trusts companies. These would not create a platform for competition nor high risk / low economic return companies that discourage new entrants. Similarly the companies yielded by the Big Four should not be their most unprofitable or troublesome clients.'

Report by Pat Sweet

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