Ernst & Young and KPMG plan worldwide merger

KPMG and Ernst & Young plan next week to announce a merger that would create the world's biggest accountancy firm. Now the second and third-largest firms, their combined annual revenues of nearly $16 billion in 1996 would enable them to leapfrog the $11.8 billion total of Price Waterhouse and Coopers & Lybrand, which revealed plans to merge a month ago.

If both deals go ahead, the Big Six firms which emerged from the consolidation of the 1980s would be reduced to a Big Four.

The merger would increase concerns about reduced competition in auditing, especially in Britain. Only 12 FTSE 100 companies are not audited by a constituent of one of the two proposed mega-firms. KPMG audits 23, Ernst & Young (E&Y) audits 18 while Price Waterhouse (PW) and Coopers together account for the rest. Dramatic client clashes loom. In the US, E&Y audits Coca-Cola, while KPMG Peat Marwick audits Pepsico. Like PW and Coopers, Ernst & Young and KPMG are expected to stress the need for greater size to meet clients' increasing demands for global services in areas such as computer systems, information technology, tax, business reconstruction and recruitment.

They can cite as evidence the rush of big international takeovers announced this week.

A senior executive at another Big Six firm said last night: "This is all about keeping up with the clients who are globalising fast. I'm just surprised it's taken so long for someone else to act."

Both merger plans will need the support of partners voting in each country in which the firms operate, and the approval of regulators in Europe, the US and Japan.

E&Y has a more globally integrated operation than its merger partner, as KPMG is widely seen as a looser federation of national firms.

Both firms refused to comment last night, but KPMG partners have been called to an urgent meeting in Britain on Tuesday. E&Y partners in Britain met in Birmingham yesterday.

Other Big Six firms believe that while KPMG and E&Y may be sincere about their merger plans, the move may also be designed to force regulators to look at both planned mergers at the same time - possibly resulting in both being blocked.

"This forces the regulators to look at both plans; it may well be a spoiler and we have been expecting that for some time," said a senior partner at another Big Six firm.

The move will focus attention on the Big Six firms which have been left out of the current round of merger proposals - Andersen Worldwide and Deloitte Touche Tohmatsu International. Andersen, now the largest, with 1996 revenues of $9.5 billion, would fall to third place while Deloittes would lag with $6.5 billion.

Deloittes is understood to have been in talks with E&Y as recently as 10 days ago, but discussions are believed to have foundered on disagreement over job security for partners.

Andersen Worldwide is made up of two separate global organisations, accountants Arthur Andersen and Andersen Consulting. It is involved in a complex internal debate over governance but may now be forced to consider a merger.