An unreal air surrounded planned move

An air of unreality has always surrounded the planned international merger of KPMG and Ernst & Young. It was announced out of the blue last October; it was cancelled out of the blue yesterday. Soon it will be difficult to believe it was ever there.

Two big questions remain. Why did the plan to build the world's biggest professional services firm founder? And what does its demise do for the merger planned by Price Waterhouse and Coopers & Lybrand?

The first question may prove almost impossible to answer for certain. Cynics will say that the merger was no more than a lowcost spoiling operation designed to frighten the regulators into blocking the merger plans of their Big Six rivals.

There is an element of truth in this view. The two firms looked unlikely bedfellows - even in the US the cultures are different, although getting closer. There were plenty of reports yesterday of bottles of champagne being popped at KPMG and E&Y's London offices. Certainly, senior executives sometimes looked less than enthusiastic about the merger proposals in the UK, although this does not appear to have been the case in Ireland.

KPMG is seen as being based on a successful federation of firms - essentially franchising a global brand. Ernst & Young was seen as a more integrated organisation internationally.

They were, in fact, a mismatch.

If the merger was not a spoiler, it failed increasingly to match up to the aspirations of its leaders. Cracks began to appear early on, and the longer UK and European partners dragged out the process leading up to a vote, the more the competition voiced its suspicions that the merger was less than it seemed. In the US they powered ahead, but in Europe there was a surreal lack of action.

Critics said the KPMG-E&Y plan was deliberately designed to be cheap: it was essentially a combination of the firms in each country, linked by an umbrella at the top. The other merger - said its leaders - was about smashing the two firms together to form one global organisation with all partners sharing risks and rewards.

There was some surprise when regulators in Brussels accepted the KPMG-E&Y plan for scrutiny without the backing of a full vote in favour of the merger by European partners. There was even a suggestion it was such a dispersed plan - one executive called it a plan for the "virtual firm" - that it might be thrown back to the national regulators for scrutiny.

Better news may reside in the decision of KPMG and E&Y to dump their merger plan. There is a growing realisation in Brussels that the Commission's problems with the mergers can only be solved by means which are in themselves anti-competitive.

Now KPMG and E&Y - largely as a result of mounting costs and disruption to their businesses - have fallen on their swords.