Does the recent mid-tier Grant Thornton/Robson Rhodes merger presage more to come? Brian Hanney investigates.
It's still not within spitting distance of the Big Four, but April's surprise announcement of a merger with RSM Robson Rhodes gives Grant Thornton a significant leg-up in the charts.
Grant Thornton produced fee income for 2006 of £284.1m, while Robson Rhodes, at number 11 in the Accountancy Top 60 league table, turned over £94.5m.
This year, Grant Thornton says the combined group will have fee income of £387.1m.
This is still around one third the size of the smallest of the Big Four, Ernst & Young, which this year will join the billionaire's club, coming in with fee income of £1.13bn.
But it's a good start, and following last month's Market Participants Group interim report on audit choice, Grant Thornton is in a good position to get what mid-tier firms have long craved - more FTSE 250 audit work.
Ironically, the move means that the number five slot, which was grabbed briefly last November by BDO Stoy Hayward, reverts to Grant Thornton.
The news comes hot on the heels of the announcement earlier in April of the tie-up between 14th placed Mazars and MRI Moores Rowlands, down at 36 (see Accountancy, May, p49).
The merged firm, which will operate as Grant Thornton UK LLP, will have 320 partners and 4,100 other staff in 40 offices. It will become effective from 1 July.
Perfect fit
Michael Cleary, chief executive of the merged operation, described the move as 'a perfect fit'. It should increase the firm's dominance on AIM, private finance initiatives and the public sector, and it will be the largest auditor of stock market companies outside the Big Four.
But, even the combined group will have fewer FTSE 350 audits, at 0.9%, than BDO, which claims 1.4% of the market.
The headquarters will remain at Grant Thornton's office in Euston, but Robson Rhodes will also hang on to its new state-of-the-art offices in Finsbury Square.
One market analyst said Robson Rhodes must have been bought 'for very little if anything'. One reason for this is that it emerged that the firm reported a loss of £3.8m in 2006. It also owed £33.4m to creditors. Robson Rhodes managing partner David Maxwell said the losses were made clear to Grant Thornton in talks. They were caused mainly by an ambitious plan to build a strategic consultancy team 'that cost millions of pounds' in addition to relocation costs, but did not get the business it hoped for.
There were then further costs in dismantling it.
However, the firm made profits in 2004 and 2005.
RSM McGladrey link
Last November Robson Rhodes announced to much fanfare that it was to be taken over by its US partner RSM McGladrey. Maxwell said at the time that the new set-up would 'enhance career opportunities for our people, who will become part of a leading organisation that is taking the industry in a new direction'.
A few weeks later, Maxwell outlined to Accountancy his plans for growth through acquisition or merging with other firms.
Ironically, he said he wanted his firm to be the fifth largest in the UK within five years. That has come true, after a fashion, but probably not in the way Maxwell envisaged at the time.
The plans for the McGladrey merger were quietly dropped.
Cleary would not discuss what money was involved, but told Accountancy he was aware there were 'some financial issues' at Robson Rhodes.
He said there was no attempt to try and outdo BDO. 'The first reason is Robson Rhodes has good quality people. It's not about league tables.
It's not about whether they're above us, or we're above them.'
There would not be a headlong run to get more FTSE 350 audit clients.
Cleary said changes would be gradual with 'nothing dramatic' in the short term. 'We also do masses of non-audit work for the FTSE 350.'
Regarding job losses, Cleary said: 'We're looking for people rather than getting rid of people.' But he added: 'We'll be looking for efficiencies in the early stages.'
Maxwell said the two firms had been 'looking at each other for a long time'. He added: 'There's an incredibly good fit. It's very hard to actually find that fit.'
On the sudden abandonment of the McGladrey deal, he said: 'We realised we couldn't get the right structure at the right time. They agreed.'
Maxwell's current role in the new set-up is member of the national management board. 'But things are evolving', he said.
BDO reaction
Naturally BDO professes to be relaxed about the latest development. Managing partner Jeremy Newman said he was 'happy' about the arrangement and had no intention of following in Grant Thornton's wake any time soon. 'We're not doing anything on the acquisition front. I'm not ruling out any acquisitions, but I'm not aware of anything suitable.'
He added: 'I'm not after growing for the sake of size. It doesn't help me at all. We've invested a lot in our people and infrastructure.'
Newman said he was not concerned about being number five or six. 'It doesn't matter if you've got the right quality of people. I'm not after a downstream merger. People are terribly fixated with league tables. They must start to look at quality.'
He added he was not surprised by the merger 'but I was slightly surprised the McGladrey deal had fallen over'.
Newman agreed there may be further consolidation in the market 'but I don't see it challenging the Big Four.'
Phil Shohet, of KATO Consultancy, said: 'It's a kind of good deal. Robson Rhodes has good clients. But it depends on the clients they cling on to.
They could well lose clients. I mean, if I wanted to join Grant Thornton, I'd join Grant Thornton.'
On the question of mergers in the profession, Shohet said: 'There are going to be a number of mergers among the top 40. They're going to go into the top 20 or merge with one another.'
Thornton Webb & Co was established in Oxford in 1904 when Reginald Thornton set up in practice in one room on the first floor of Lloyds Bank Chambers.
With brother Francis, the firm became, in 1925, Thornton & Thornton.
One of the firm's first clients was Morris Motors founder William Morris, whose company Thornton helped to float.
During the pre-war years the firm expanded internationally when it became auditor of companies acquired by Morris in Le Mans, Delft and Madrid.
By 1959, Thornton & Thornton had grown to 16 partners in Oxfordshire, as well as in London and Birmingham. That year it merged with Baker & Co.
In 1979, Alexander Grant & Co, a large US firm, and Thornton Baker, agreed to set up an international umbrella organisation, which was later named Grant Thornton International.
HISTORY OF RSM ROBSON RHODESRSM Robson Rhodes' origins date back to the 19th century when a number of sole practitioners, which were the norm at that time, fixed their brass plates outside their places of business in various parts of England. Over the years, they joined up.
Today's RSM Robson Rhodes was formed in 1970 by the merger of Blackburns Robson Coates and Ford Rhodes Williams.
Blackburns' powerhouse was its Leeds office, and Ford Rhodes Williams had a strong international presence, particularly on the Indian sub-continent.
Other mergers in the following years provided the base for the Manchester presence, through Ashworth Moseley, and Impey Garland in Birmingham.
On 3 May 2003, RSM Robson Rhodes became RSM Robson Rhodes LLP.