how artificial intelligence will drive the next wave of merger mania

it may be time to prepare a plan b.

by domenick j. esposito
8 steps to great

we are halfway into the year 2017 and the frenzied pace of cpa firm mergers and acquisitions – when compared to the years 2015 and 2016 when there were over 100 and over 200 transactions, respectively – has not slowed down one bit.

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we continue to witness a perfect storm caused by:

an economy that continues to be on a sluggish course:
- clients who continue to experience slow growth, if any, and aren’t in need for cpa services beyond the basic compliance services
- net profits per partner that continue to be not as healthy when compared to what they were circa 2006-2007
- average collected rates per hour that continue to trend downward by 10 percent to 15 percent because of the mix of services and predatory pricing throughout the marketplace

partner demographics that continue to be in an inverse pyramid: top-heavy with baby boomers and lean with “under 40” superstar partners
firms that continue to lack enough rainmakers and business people
partner-level talent, particularly tax talent, that is nearly impossible to find
marquee clients who are demanding higher quality services
leadership and corporate governance that aren’t properly aligned. as a result, many smaller firms aren’t able to capitalize on the opportunities presented to them.

over half of the transactions consummated in the recent past have been closed by the bigger, stronger top 100 firms, who are generally perceived as more profitable. so, the big firms keep getting bigger, stronger and more profitable – making it even harder for small and midsized cpa firms to remain independent.

it is not unreasonable to mistakenly conclude that “merger mania” will slow down sooner or later but while it is true that “merger mania” can’t go on forever, we don’t see any end in sight. anecdotally, we observe that more than one out of every two cpa firms of any significant size is either discussing a merger combination, acquisition or sale or is planning to do so in the near future. and, as if it hasn’t been hard enough for the small and midsized cpa firms to compete, we now see a fast-moving freight train named technology that will more than likely accelerate the merger frenzy.

i believe that multiple mergers and acquisitions, including one or two among the top 20 firms below the giant four, possibly even a merger of equals between top 10 firm #8 through top ten firm #12, are in the cards at least in the near term.

there isn’t a day that goes by without a technology impact discussion among the leaders in the profession. take, for example, the recent presentation at the 2017 aicpa engage conference when aicpa chair kimberly ellison-taylor and president and ceo barry melancon made the following points:

accountants will be negatively affected by changes in technology – losing over 1 million jobs!
the very biggest cpa firms have invested hundreds of millions of dollars in new technologies in the audit and other areas.
there is a danger of dividing the profession between those who have modern audit tools and those who don’t.
technologies such as artificial intelligence, blockchain and data analytics have the potential to completely reshape the landscape in all of the profession’s core services and create new challenges and new competitors.
the profession must make investments in transforming its services. what is a cpa’s competitive advantage? what are cpa firms doing to maintain the trusted advisor role?
recruiting and retention of staff will become even more challenging.
how does the small practitioner compete?

so, this perfect storm, coupled with the freight train named technology, begs the question:

does your firm have enough critical mass, talent and profitability to stay the course and deal with all the challenges coming at you? if you are doubtful that your firm can weather the storm, is now the time for your firm to carefully evaluate “plan b” alternatives such as:
- merging up,
- merging with an equal or
- acquiring?

don’t wait until the last inning of the baseball game when your key partners are nearing retirement. as long as the economy stays anemic and your clients aren’t demanding an awful lot of advisory or consulting services from you, valuations aren’t going to get better in the immediate future.

if you’re not sure your firm can survive and prosper through all these challenges, you should consider pursuing one of the “plan b” alternates:

smaller firms if you have a quality senior management team who can devote time to integrating any new firms. remember that integration of partners, staff and clients is considerably harder than consummating a transaction and that accretion to partner profitability usually doesn’t take place until year three post-merger – maybe year two if things fall into place quickly.
merge with an equal if there is a strategically good fit that can give you an opportunity to propel with the firm’s growth rate. remember that a merger of equals requires that you blend two cultures that are different despite some similarities.
if you are convinced that your people and your clients will find a home where they would be better served than if you remained independent. remember than merging up will create an environment that some of your partners will not be comfortable with so there will be some collateral damage including client losses.

artificial intelligence is reality for the accounting profession and if your firm is going to deal with it head-on, you are going to make some significant investments in time and dollars. if you are not sure that you will able to make those investments, revert to “plan b.”

a word of caution, however, i implore you – no matter how tempting it may be, don’t pursue a “plan b” transaction if 1 + 1 doesn’t at least equal 3. if your gut tells you that this will not be the case with a particular transaction, pass on it. it probably isn’t right for your firm. there will be others.

posted on june 29, 2017

dom esposito

about the author

domenick j. esposito was the ceo of grant thornton, vice-chair of bdo, and national growth director at cohnreznick.

he is the author of "8 steps to great: the eight essential strategies driving success at the world's largest cpa firms. and how to apply the lessons at firms of all sizes," published by 卡塔尔世界杯常规比赛时间.

a life in public accounting

in 2016, esposito, then a former ceo of bdo, moved from a 46-year career in public accounting into the next phase of his professional life – consulting to cpa firms, launching a boutique advisory firm, esposito ceo2ceo, that provides advice to ceos, managing partners and other senior partners of cpa firms focused on the mid-market throughout the u.s.

with the launch, esposito authored “8 steps to great," a guide for ceos, managing partners, and other senior partners on how to move their firm to the next level.

cohnreznick national growth director

esposito was one of the most qualified individuals in the country to advise cpa firms on growth and profitability. through 2015, he was national practice & growth director and an executive board member of cohnreznick, llp, a mid-market sustainable brand and the tenth-largest cpa firm in the united states. he oversaw cohnreznick’s go-to-market industry specialization and consulting and advisory service lines. he was also intimately involved in the firm’s mergers and acquisitions and strategic and tactical activities for its public company and capital markets initiatives. dom joined the predecessor firm of j.h. cohn in 2002 as the chief operating officer and executive board member.

dom was also an independent director of ethan allen interiors inc. for several years (through 2014), dom was a member of the nasdaq listing and qualifications committee to the organization’s board of directors. he formerly served as the leader of the new york state society of cpas committee for large and medium-sized firms practice management. he also was an adjunct accounting professor at c.w. post/long island university.

bdo and grant thornton

through october 2002, dom was vice chairman at bdo, a mid-market sustainable brand and the seventh-largest international accounting and consulting firm in the u.s., with almost 50 offices and 3,400 employees. during his brief time with bdo, he was responsible for the alliance distribution network (at the time consisting of over 80 cpa firms, 10 law firms, and 25 consulting firms). he was also responsible for attracting and servicing a number of clients.

from 1979 through 2001, dom was with grant thornton, another mid-market sustainable brand and the sixth-largest international accounting and consulting firm in the u.s., with over 50 offices and 4,500 employees. he joined grant as an audit manager, became a partner in 1981, led the long island office from 1984 to 1986, became assistant managing partner of the new york office in 1986, and from 1988 to 1999, led the new york office. in 1999, esposito became a regional managing partner and for two years, through 2001, was the firm’s chief executive officer.

cpa, partner, mba, leader, influencer, media celebrity

between 1996 and 1998, and while he was ceo, esposito was on the partner board and was also on the board of grant thornton international – the worldwide umbrella organization. in these capacities, he developed strong experience in strategic thinking and execution, international relationships, corporate governance, partnership matters, branding, expense control, client relationships, and new business development.

as ceo, he took grant thornton to record earnings, consummated the largest line-of-business sale in the firm’s history, developed a major joint venture with axa financial, and made the largest practice acquisition in the firm’s history. from 1969 to 1979, esposito was with price waterhouse (now pwc), servicing ibm when he was promoted to manager in 1976.

dom was a cpa, has been quoted in national and local media, and has appeared on radio and cable tv.

esposito also testified before the securities and exchange commission.

he received his m.b.a. from st. john’s university and his b.s. from ferris state university. accountingtoday, one of the leading trade journals for the accounting profession, named esposito one of the most influential people in the profession for two consecutive years.

he passed away in 2021 at the age of 74.

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