Cohn-Reznick deal closes as market pressures portend more mergers

J.H. Cohn LLP and the Reznick Group have closed on their previously disclosed merger, a transaction that creates the 11th-largest U.S. accounting firm and represents the second marriage of top 20 firms consummated this year.

The Cohn-Reznick combination, first announced in May, creates a firm with 2,000 employees, 25 offices, and annual revenue in excess of $450 million. The new firm unveiled in a news release Wednesday that it has chosen CohnReznick as its new name.

Thomas J. Marino, CPA, CEO of J.H. Cohn, and Reznick Group CEO Kenneth Baggett, CPA, will serve as co-CEOs of CohnReznick, which will maintain Cohn’s membership in the Nexia International global network.

Wednesday’s announcement came nine months after Clifton Gunderson and LarsonAllen closed a merger that created one of the 10 largest U.S. accounting firms, one with annual revenue of more than $550 million, offices in 25 states and the District of Columbia, and a workforce of more than 3,600 professionals and 500 partners.

The Cohn-Reznick and Clifton Gunderson-LarsonAllen deals are the largest in a series of mergers involving top 50 accounting firms over the past three years. Other deals of note include Plante Moran and Blackman Kallick LLP closing July 1 on a merger creating a Chicago-based firm with more than 2,000 employees, 22 offices, and $375 million in revenue, and Dixon Hughes merging with Washington-based Goodman and Co. in 2011 to form Dixon Hughes Goodman, a Charlotte, N.C.-based firm with 1,700 employees.

Competition, succession pushing upswing in mergers

Look for the trend of accounting mega-deals to accelerate over the next couple of years, said Joel Sinkin, president of Transition Advisors LLC, a New York-based company that specializes in brokering accounting firm mergers. He predicts that the pace of accounting M&A activity will quicken, peak, and then plateau at a “reasonably high level” for several more years, at least until the transition of Baby Boomers into retirement slows down.

“I would be surprised if we don’t see several more mega-firms created through mergers,” said Sinkin, who was not involved in the Cohn-Reznick deal.

A couple of main factors will fuel a rush of accounting firm mergers over the next several years, Sinkin said.

• Top 100 firms will continue to look for deals that strengthen their competitive position and capture market share by growing their geographic footprint, expanding their service offerings into more niches, and bolstering their talent and client bases. These dynamics can be seen in the Cohn-Reznick deal, in which Bethesda, Md.-based Reznick’s strong presence in the mid-Atlantic and Southeast is combined with New Jersey-based Cohn’s foothold in the Garden State and in New York City, where the combined firm will be based. The merger also creates a larger mix of service offerings with Reznick’s strength in the affordable housing and commercial real estate niches added to Cohn’s portfolio of tax, auditing, and business-consulting services. The new firm also features a stronger California presence fortified by offices from both of the merging entities. “In the current economic environment, clients require a strong combination of geographic reach, diverse resources, and deep industry expertise,” co-CEO Baggett said in the news release.
• The mass movement of Baby Boomer partners toward and into retirement over the next several years will drive smaller firms to look for ways to fund partner retirements. With retirement prefunding still relatively rare, retiring partners in accounting firms will be looking for the sale of their ownership stakes—either to the firm in the form of a buyout or to an outside buyer—to provide the money to live on in their retirement. However, most firms have not yet implemented formal succession plans, and the financial strain of funding the retirement of multiple partners could prompt many firms to seek upstream mergers with larger firms that would provide the funding needed to purchase the Baby Boomers’ ownership stakes.

“In many marketplaces, there may be as many as 50 firms generating $3 million to $8 million in annual revenues but only a handful of firms large enough to absorb them,” Sinkin said. “(By the time) many of these firms … realize they lack an internal succession plan that will work, they will be in a buyers’ marketplace.”

The value of the smaller firms will drop as supply increases, Sinkin said. Firms with young partners and young talent nearly at partner level will generate the most demand. Other firms may have to implement creative measures, such as selling off portions of their business, to find ways to survive with a smaller partner base. 

The trends shaping the merger market for accounting firms will have the least effect on sole proprietors and two-partner firms, Sinkin said. “Many of the clients they tend to have don’t want big firms, and big firms don’t want them. If they are in a densely populated region of the country, they will still have a strong market for their firm, and buyers will be there.” 
 
—Jeff Drew (jdrew@aicpa.org) is a JofA senior editor covering practice management.