The big players are long gone together with acquisitions for the sake of it, says one specialist, but AI could be a driving force behind future M&A.
‘Covid changed merger dynamics, tech has become a wildcard’
A spate of mergers and acquisitions in the accounting industry shows the dynamics around consolidation have changed dramatically since the pandemic and technology has become a wildcard with unknown effects, according to one expert.
Merger and acquisitions specialist Kev Ryan, the principal of an eponymous firm in Queensland, said some businesses like Carbon Group and Kelly Partners had an M&A philosophy and vision, but big players with millions to spend had been absent for years.
Instead, four factors were driving consolidation: economics, succession, the talent shortage and wanting to be part of a team in the wake of COVID-19.
“There's always been the older guys looking for a bit of a succession outcome – there's always people trying to cash in from an economic point of view,” he said.
“But over the last couple of years, the M&A activities have been around sole practitioners not wanting to be alone any more. What I see now is since Covid, burnout has taken effect. And people are going, ‘I don't have to be the general. I'm happy to hitch my wagon to a bigger bus, so that not all roads lead to me’.”
The attitude of sole practitioners had changed and they were now happy to trade some independence for an improved lifestyle and “reward from the actual work”.
He said the days of doing a deal for the sake of it were gone and the parties had to answer key analytic and strategic questions.
“Why are these parties coming together? What are we solving for? What are the opportunities we can seize if we're together? What are the efficiencies we can achieve if we're together?”
One of Ryan’s clients, Carbon Group has a declared “aggressive growth strategy” by acquisition and this week Brisbane minnow Integrity Wealth became its sixth takeover this year, almost tripling its headcount in the process.
Also this week Moore Australia took over boutique Perth practice Quay Associates, which managing partner David Tomasi described as “another key step in our growth strategy” following the addition of Geelong-based Proadvice in July.
He said a key factor in many mergers was the talent drought.
“The number one thing they're solving for there is the staffing issue. That's been really ratcheted up in the reasons why these firms are looking to transact.”
Mr Ryan said one thing stayed the same in M&A: it was a seller’s market. However, technology injected a wildcard into what would drive mergers in future.
“We're scratching our heads around AI, robotic process learning, the manufacturing of compliance – which is what this industry is at its core. What does this look like for the smaller suburban firm that doesn't keep pace? Is there a blockbuster moment on the horizon? It's fascinating. None of us seem to have all the answers to that just yet.”
“What does technology do for the valuation of firms? Is it an opportunity for the early adopters to pick up renovator dreams? Do those ordinary accounting businesses become more attractive because you can grab them and supercharge profits if you’re across the technology?
“So it's either going to be a benefit for M&A, or it could be a killer.”
He said “every owner of an accounting business wanted to do it their own way” but the days of the small operator were far from gone.
“The barriers to entry here are minimal. So if you’re a senior at BDO earning not much money from people you don't really respect or like, you can get a tax agent number, a laptop and a Xero subscription and probably make the same money at home in your boardshorts over three days a week – the micro-businesses are always going to be there.”
“You'll always have an industry of varying speeds and sizes of firms.”
He said those who correctly read the opportunities in tech and seized the opportunity could rapidly rise to prominence.
“There are some smart cookies having a real think about the tech, the AI, and having to club up together because they're all going to run off and spend millions individually but if they pool their resources, get ahead of it and check their egos at the door, you might see some really savvy $50 million to $100 million dollar firms pop up pretty quickly.”
“If you can get savvy 30-year-olds to pool their resources, which I’m starting to see now, you'll have dynamic firms servicing kids of the Boomers where the mid-tier and Big 4 just aren't attractive.”