Big firms merge; smaller ones ponder.

The business press was still publishing news stories on the proposed merger between Coopers & Lybrand and Price Waterhouse (see "And Then There Were Five," JofA, Dec. 97, page 10) when Ernst & Young and KPMG Peat Marwick seized the headlines with their own merger plans, which would create an even larger firm. The resulting E&Y/KPMG firm would have

* More than $18 billion in revenues.

* Close to 13,000 partners.

* Philip Laskawy, Ernst & Young's chairman and chief executive officer, as chairman.

* Stephen G. Butler, KPMG's chairman and CEO, as CEO.

Although the pundits did not specifically predict this latest merger when C&L and PW made their announcement, Gary J. Previts, professor of accountancy at the Weatherhead School of Management, Case Western Reserve University, Cleveland, and J. Curt Mingle, a member of Clifton, Gunderson LLC, in Ephraim, Wisconsin, both had told the Journal in last month's article that they were expecting more high-level mergers.

Picking up clients -- and staff

The Journal asked several members of the American Institute of CPAs practice group B advisory committee, which serves as a forum for the largest non-Big Six (or Four) firms, to share their personal thoughts on the implications these mergers have for other firms.

"I believe the mergers may cause some of the smaller companies to leave the Big Four and thus give us and similar firms a chance to bring them in as clients," said Lawrence M. Zagarola, a partner of J. H. Colin in Roseland, New Jersey. Cohn has about 38 partners. William E. Fingland, Jr., a partner of Baird, Kurtz & Dobson, a 119-partner firm in Springfield, Missouri, is also looking for clients. "We hope that certain kinds of clients, that don't want an even bigger firm, will look for an alternative." Even McGladrey & Pullen, one of the largest second-tier firms with 380 partners, sees its relatively smaller size as an advantage. "These mergers -- designed to better serve large multinational clients -- make it obvious to middle-market clients that they are not part of the Big Four client base," said LeRoy E. Martin, a partner in Bloomington, Minnesota. "Such companies will look to group B firms for the services they need."

But the real competition may be for staff. Cohn, BKD and M&P expected senior managers and partners to leave the newly merged firms; even personnel not actually forced out may find the resulting firms not to their liking. Amazingly, a lot of really good people who would not be casualties of a merger feel they're going to be and start looking around," said Martin.

Cohn, BKD and M&P have no current plans to merge with other firms. However, Zagarola said second-tier firms would continue to merge, even without the impetus of Big Six mergers. Martin said after the flurry of mergers in the mid-1980s and early 1990s most group B firms had found comfortable regional or industry niches and were not expecting to consolidate further. Fingland echoed this, saving, "I don't see how mergers in firms our size would help our clients. The Big Six apparently believe they have to be larger to perform their consulting services. But I never heard of a Big Six client saying, 'You have to be even larger to serve us.'"