Urge to merge

The last couple of years have been tumultuous for some accounting firms.

The Big Five turned into the Big Four when Arthur Andersen collapsed in the wake of the Enron scandal, and the Sarbanes-Oxley Act imposed tough penalties on those who would dare to cook the books or look the other way when confronted with corporate financial wrongdoing.

On the other hand, smaller firms are finding opportunities to take work that has left or been abandoned by the Big Four firms, which are rethinking how they conduct their practices and, in some cases, are dropping clients because they are unprofitable.

Dan Stokes and his partners at Stokes & Hinds, a regional firm based in the North Hills, decided to look for a merger partner that would take it to super-regional status and offer opportunities to bid on work with larger clients. The Big Four, says Stokes, are likely to continue doing what they do best, which is servicing the largest companies.

That means that mid-sized companies and regional and super-regional accounting firms might find each other a better match.

For Stokes & Hinds, the right fit came in Parente Randolph, a firm with a strong presence in Central and Eastern Pennsylvania, New Jersey and Delaware. The merged firm comprises 50 principals and more than 350 employees.

Says Stokes: “We’re seeing a lot more opportunities with customers who used to think only about the major international accounting firms consider that maybe a regional firm is one that they want to deal with.”

Stokes talked with Smart Business about changes in his industry and why his firm sought a merger.

What are some of the changes that have affected the accounting profession?

I think the effects of Enron have really filtered down through the entire industry, and it’s especially affected the international accounting firms. And one of the things you’re seeing is a restructuring within the (Big Four) firms to retrench and re-evaluate how they do business, and also a re-evaluation by their clients.

I think that retrenching is happening on both sides, from the Big Four and from their customers and from the rest of us, what we call the regional firms. We are starting to look at our customers differently, and the customers look at us a little differently.

Why did Stokes & Hinds seek out a merger partner?

We thought there was one tier of regional firms that were the next tier, and here we found out that maybe there were three tiers, the major firms, the regional firms like we used to be, 30 to 50 people, and then there are the super-regionals that have maybe 200-plus. We felt that what was happening was that companies that were leaving the Big Four were looking at the 30- to 50-person firm, but more and more of them were gravitating to the 180- to 200-person firm because they felt that they had the resources that they were used to.

How did you go about finding a merger partner?

Actually, we were considering a merger of equals. We were looking for another firm that was about 40 or 50 people that we could take to 100-plus and maybe get a little closer to being viewed as in that second tier.

Why was Parente Randolph a good fit?

First of all, the culture they had was very similar to ours. We recognized the support that they could give us overnight that the business community would recognize and also some internal resources.

We were getting to the point where you get so large, around 40 or 50 people, human resources becomes a full-time project for somebody, marketing becomes a full-time proposition. To do them right, you need to hire high-end, competent individuals, and that takes a lot of money. We saw the opportunity to acquire the resources to allow us to service our customers a little better and choose some customers a little larger than we had been going after in the past.

And second, with the flip of a switch, we got administrative help that would have cost us hundreds of thousands of dollars and years to put into place. So we moved our potential growth plan up dramatically. We knew where we had to go; we just thought it would take us years to get there.

How is the corporate culture similar?

I’ve always considered Pittsburgh to be one of the biggest small towns in America. Parente Randolph was created in Northeastern Pennsylvania, in Wilkes-Barre, a very similar area to Southwestern Pennsylvania, as opposed to New York, the Philadelphia market or Washington, D.C.

It’s a different attitude toward business, a different attitude toward customers. We found, to our surprise, that they really matched our approach, from serving customers to taking care of staff to handling partner disputes. They really did things the same way we do.

Eighteen months seems like a long period to complete a merger. Why did it take that long?

Our industry is a very labor-intensive industry. Each of the managers is an owner, and there’s no one or two people that have control over a CPA firm. It’s really run by committee, so you just about have to get everybody on board or you have massive defections.

You’ve got to make sure that all the major parties, from owners down to staff, are on board with the merger, and that takes a lot of time, a lot of talking. There are a lot of concerns. The owners’ concerns are different than the two-year staff person’s concerns.

So there is a whole lot of discussion that you have to go through to allay everybody’s fears. Since the merger, we’ve only had one person leave, one person with less than a year’s experience left the firm. Everybody else is still here.

How did you work out the details?

The actual negotiations were by a small group of individuals.

Surprisingly, that group of individuals from our side was the junior partners, not the senior partners. We felt as senior partners, whatever mistakes we might make, we’ll only have to live with them for five or 10 years. These guys have to live with it for 20 or 25 years. We kept our opinion to ourselves.

Once we decided that this organization was interesting and somewhat of a match, we let them work out the details and see if they wanted to do this.

What advice would you give to a business owner looking for a potential merger partner?

Find out if you’re talking to a company whose approach to business is similar to yours, that’s probably first. The next thing I would do is get all the major interested parties involved as quickly as possible.

Spend as much time as you need prior to the decision to make sure that the merger runs smoothly. How to reach: Parente Randolph, www.parentenet.com