Big Four accountants stake out middle market

Friday 1st June 2001

KPMG took top place with 26 completed deals. Pricewaterhouse-Cooper (PWC) came in third with 13, followed by Deloitte with 11

CORPORATE FINANCE

By Nick Stride

The deals are getting smaller and so are the dealmakers.

As many of the country's large corporates depart or dissolve, accountancy firms' corporate finance arms are coming into their own.

They don't show up yet on the mergers and transactions league tables, in value terms at least. Last year yielded a bumper crop of M&A work with the latest Thomson Financial tables showing deals worth $15.8 billion, the highest figure since 1996.

More than half of that came from the sales of Fletcher Challenge's Paper and Energy divisions, helping push global investment banks Deutsche Bank, Credit Suisse First Boston, and J P Morgan (now part of Macquarie New Zealand) to the top of the value tables.

In fact none of the relatively recently established accountancy firms' corporate finance arms makes the top ten. The tables for deals by number, however, tell a different story.

Last year KPMG took top place with 26 completed deals. PricewaterhouseCooper (PWC) came in third with 13, followed closely by Deloitte with 11.

The traditional accountants' conservatism has meant the Big Four (elsewhere the Big Five but Arthur Andersen doesn't have much of a presence in this country) arrived late on the corporate finance scene.

But now it's their biggest growth area both in New Zealand and globally.

The teams are still small by investment bank standards. PWC is the biggest by far with 86 staff in corporate finance and 13 in investment banking. Deloitte has 40 (only half of whom, points out director Peter Simmons, have accountancy backgrounds). KPMG has 20 and Ernst & Young a slim but nimble five.

They don't show up on the value tables because the investment banks, which are able to use their balance sheets to underwrite the large equity and debt issues, still dominate the big end of the market. Fletcher's advisers for all four divisions last year were global investment banks.

But that doesn't mean they're lagging the banks in market share. A lot of their deals involve private companies - deal numbers can be disclosed but the values are confidential.

While their corporate finance activities are burgeoning worldwide local factors have helped drive their growth in New Zealand.

"What's happened is that the merchant banking community, the Southpacs, Buttle Wilsons and Fay, Richwhites have basically disappeared," says Ernst & Young corporate finance director Robert Pigou.

"The accountancy firms have provided a platform for the development of corporate finance arms in the void that's been created by their disappearance."

The global investment banks, which set up shop here in part to cater to previous governments' privatisation pro-
grammes, have been moving out too, although long-stayer CSFB has been joined more recently by Deutsche, ABN Amro and Macquarie.

While most of the newcomers are aiming for scale and bigger deals they generally see their future in the middle market.

KPMG, for instance, is targeting transactions in the $5 million to $50 million range, not the $100 million-plus the investment banks typically pitch for.

"Certainly our ambition is to push up the the transaction size scale but we think we've got it right - the middle market's the place to be," KPMG corporate finance director Mike McDonald, says.

Ernst & Young, on the other hand, has grander ambitions.

"We're quite happy to leave the small M&A-type transactions - $5 million to $10 million - to other people," says head of corporate finance Gareth Morgan (who should not be confused with the rambunctious economist of the same name).

Mr Morgan says Ernst & Young is "quite active in deal origination," although a lot of its work, especially overseas, isn't visible.

"Quite often we'll be displacing some of the big investment banks."

His team, for instance, has a close relationship with Vodafone Pacific. It brought in the British-based company to buy BellSouth New Zealand and arranged the sale last year of Vodafone's Australian cellphone transmission towers to Crown Castle.

It also handled the original commission to market the Royal New Zealand Airforce's Skyhawks before the replacement F-16 deal was cancelled by the government.

The accountancy firm corporate financiers tend to stress the differences between themselves and the investment banks. They pride themselves on relationship-, not transaction-based mentalities.

"We're going to be in New Zealand forever," Deloitte's Mr Simmons says.

"We don't just come in and do the deal and move on."

While the range of services they offer companies is broadening steadily, buying or building sharebroking and retail distribution arms, or seeking alliances with existing players isn't yet on anybody's agenda.

"We're thinking about it but we're not talking to anyone," Mr Simmons says.

"We're independent of the dollars. We won't push our own product down our clients' throats - we can say to the customer 'we'll get the best distribution available for you'."

The investment banks are not sure those comparisons are fair or useful.

"We're seeking to provide for New Zealand corporates a full range of services and expertise in Australasia and other markets, not a fly-in, fly-out from Sydney basis," ABN Amro corporate finance head Robert Bogers says.

"Given the small size of this market you have to have an all-round capability."

One development the accountancy financiers are watching warily is the spotlight put on possible conflicts of interest by Arthur Levett, the former chairman of the US Securities Exchange Commission.

During the latter part of his recent rule Mr Levett was given to wondering loudly how a firm could be relied on to provide vigorous and independent auditing of a company to which the same firm's consulting and corporate advisory arms were trying to sell services.

Mr Levett wanted the audit function separated totally from other services but he didn't get his way. Nonetheless, says Deloitte's Mr Simmons, "he's caused all of us some angst over the last couple of years. I hope it (separation) doesn't happen because it's a huge benefit to us being part of the Deloitte family."

Any change could benefit the investment banks and niche players such as Grant Samuel, which claims a 90% market share by value for independent appraisal reports on corporate mergers and transactions.

The new Takeovers Panel, for instance, might require companies to commission their reports from a firm independent of its auditors.

Players right across the corporate finance spectrum expect company activity to quieten over the second half of this year, on the surface at least.

In the short term the flood of takeovers prompted by the impending enactment of the Takeovers Code is expected to dry up after July 1.

Further privatisations are unlikely while a centre-left government holds office. And the migration of larger corporates across the Tasman looks set to continue to shrink the deal gene pool.

That doesn't mean the deals will dry up.

"The New Zealand market is inherently lumpy," ABN Amro's Mr Bogers says.

"But the 'quiet' times aren't necessarily quiet. For every one transaction reported there are another two or three that didn't get completed."

ABN's role in the Contact Energy privatisation boosted it up the deals-by-value charts in 1999 but it has since been joint lead arranger of a $300 million bridge loan for Telstra Saturn and arranged the $900 million finance facility.

In the equity markets it handled the $73 million Contact buyback, the $125 million Lion Nathan buyback, Powerco's $289 million listing, and the $38 million secondary market offer for Alliant and Infratil.

In common with the Big Four financiers Grant Samuel reports, "quietly, without making too much fuss," plenty of work among unlisted companies. For instance, says managing director Michael Lorrimer, it has helped Tyco, the US' fastest-growing company, to buy "dozens" of firms in Australia and New Zealand, most recently petroleum equipment company Fuelquip.

Ernst & Young has been working with medical insurer Southern Cross for five years, has acted for Trans Tasman Properties, and advised on last year's restructuring of Waltus Properties.

The next five years, everybody seems to agree, will see the steady demise of the bigger equity-based transactions.

Even so there will always be a need for good corporate advice.

"To whom does the managing director talk when there's huge change?" Ernst & Young's Mr Morgan asks.

"If he talks to his board it indicates he doesn't have the answers, with his staff there are similar issues, and if he talks to his competitors there are obvious problems. We need to stand alongside him."

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