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The East: Measuring The Impact Of Accounting Giants' Merger

Prague, 21 October 1997 (RFE/RL) -- A planned merger between two of the world's largest accounting and consulting firms has raised concerns that globalization is stifling competition in the financial services sector.

KPMG Peat Marwick yesterday confirmed that it plans to merge with Ernst & Young as early as the start of next year. With combined revenues last year of more than $18 billion, both are among the world's six largest accountancy firms -- known as the "Big Six."

Two other Big Six firms, Price Waterhouse and Coopers & Lybrand, announced similar merger plans last month. Meanwhile, a wave of merger-mania has been sweeping the world of international finance as rival bankers, stock brokers, insurers and accountants try to boost profits and cut expenses by joining forces.

If the latest accountancy mergers are approved by the firms' partners and by international regulators, the so-called "Big Six" would by reduced to a "Big Four."

Critics say reduced competition in financial services would be immediately apparent in the United Kingdom, where the two proposed mega-firms would be the auditors of all but 12 of the top 100 companies listed on the London Stock Exchange's FTSE-100 index.

The mergers also would be felt across Eastern and Central Europe and the former Soviet republics. Each of the Big Six firms plays an important role in the transition to market economics. They work as privatization and legal consultants, as well as auditors and advisers to governments, state firms and private businesses.

The Big Six were among the first international companies to establish offices across Central and Eastern Europe. KPMG clients include some of the top foreign investors in the region -- firms like Philips Electronics, Siemens Group, Nestle and Royal Dutch/Shell Group. The consultancies provide information on different countries that is vital to the corporate strategies of the multinational firms.

For both state and private firms in the emerging markets of the former Communist world, an audit by one of the Big Six firms is essential for attracting foreign partners. Potential foreign investors say a Big Six cover letter ensures that an unknown firm's balance sheets have passed the muster of international accounting standards.

Both KPMG and Ernst & Young admit that their merger would strengthen their market position in Eastern Europe and the former Soviet Union.

The chairman and chief executive of Ernst & Young, Philip Laskawy, told the "Wall Street Journal" yesterday that the proposed deal would help both firms better tackle the Russian market.

But shrinking competition in the financial services industry is raising calls for tight regulatory scrutiny of the proposed mergers in order to prevent the creation of new monopolies.

A recent editorial in the "Financial Times of London" says reducing the Big Six to a Big Four is an "intolerable prospect." The newspaper urges competition authorities to block the proposed deals, saying that accountancy mergers already have gone far enough.

European Union officials have confirmed that they will investigate the latest merger proposals. In mergers of non-EU companies worth more than $5 billion, the EU can demand changes if the deals would have an impact on EU markets.

Other regulatory agencies that would have to approve the mergers include the U.S. Security and Exchange Commission and the U.S. Justice Department.

But Steve Sunshine, a Washington anti-trust lawyer and former head of merger review at the Justice Department, predicted yesterday that a merger of KPMG and Ernst & Young would "sail through" in the United States.