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November 29, 1997

Coopers & Lybrand Partners OK Price Waterhouse Deal

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    The partners at Price Waterhouse and Coopers & Lybrand, two of the world's largest accounting firms, have voted overwhelmingly to merge their practices into one.

    The merger, however, must still be approved by the Department of Justice, which is now looking at whether four or five major accounting firms are enough to audit the books of the nation's public companies. And the firms are still on the prowl for a name for the combined entity.

    A similar merger has been proposed by two other major accounting firms -- Ernst & Young and KPMG Peat Marwick. The partners at those two firms are expected to vote on that merger in mid-December. If both combinations are approved, the accounting firms now known as the Big Six would become the Big Four.

    More than 95 percent of the partners in the offices of Price Waterhouse and Coopers & Lybrand around the world voted to approve the merger, said Arthur W. Bowman, the editor of Bowman's Accounting Report, a trade newsletter in Atlanta. Bowman said he had confirmed the results with partners at both firms. "It is done," he said.

    Officials at the two firms said Friday that they planned to make a formal announcement on the results of the voting early Monday. But Mike Ascolese, a spokesman for Price Waterhouse, said he could not dispute Bowman's report.

    The partners had finished voting Wednesday night, Ascolese said. He added that the firms would announce a new name before year-end.

    He also expressed confidence that the merger would pass muster in Washington. "The regulators have been talking to people and conducting interviews at our clients," Ascolese said. "We are confident that we will get regulatory approval."

    Joe Simms, an antitrust lawyer at Jones, Day, Reavis & Pogue in Washington, who is working on the Ernst-KPMG merger, said Friday that the Justice Department had focused on one issue: whether four accounting firms would leave the nation's 1,000 largest companies with enough options when deciding which firm should audit their books.

    Simms said he believed that many of the firms' audit clients had been telling Justice officials that four firms would be enough. "My impression is that the agencies are moving right along," he said. "I think the mergers will go through."

    In some industries, however, the combined firms would clearly dominate, giving executives little choice if they wanted to change auditors and feared that the remaining firms lacked expertise. For example, in banking, Ernst and KPMG together audit 17 of the 25 largest banks, according to the Public Accounting Report, an industry newsletter in Atlanta. Those clients could presumably face steep switching costs if they shifted to an auditor that had to learn a complex business like theirs on the job.

    The mergers also need approval from regulators in other countries. Howard Davies, the chairman of the Financial Services Authority in London, Britain's most powerful financial watchdog, has said publicly that he already has concerns about the "high degree of concentration in the audit of banks and other financial institutions," a situation that would only be aggravated by the mergers.

    For their part, the firms have said they need to better serve clients that are merging and expanding worldwide.

    The merger of Price Waterhouse and Coopers & Lybrand would create a worldwide behemoth with 135,000 employees, 8,500 partners and about $13 billion in revenue. Only the combined firm of Ernst & Young and KPMG Peat Marwick would be larger.

    But not all partners are buying into the top managements' vision for the firms. Grady E. Means, the Washington-based manager of the Coopers business strategy consulting practice, circulated a passionate six-page memo to scores of his partners Nov. 6 characterizing the merger as a takeover of Coopers by Price.

    "This deal is pathetic from a C&L point of view," he wrote, warning them that one out of three audit partners would not be there two years from now.

    Coopers, he said, quoting the prospectus, produces 46 percent more in audit fees than Price but has double the number of audit partners. Thus, he said, the firm's new leaders would be tempted to slash 1,000 to 1,200 audit partners worldwide, including 300 in the United States, from the Coopers ranks to put the two firms on an even footing.

    Partners who got pink slips would face added woes in light of the "severe" noncompete agreements he said they had been asked to sign.

    Given his contention that Coopers earned $1.5 billion on revenue of $7.5 billion, he urged his partners to consider other alternatives including remaining independent or selling off those parts of the firm that could fetch a premium.

    A merger, he said, "will destroy many of your careers and the businesses that you have built -- and it will do it quickly."

    Means did not respond to messages left at his office Friday.

    Ascolese said the firms were "not anticipating layoffs."

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