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Connect, Winter 2009-2010 - EY: 20 years in the making - Anatomy of a merger - EY - United States

Anatomy of a mergerRay Groves and William Gladstone

Ray Groves
CEO, Ernst & Whinney (1977-1989)
Co-CEO, EY (1989-1991)
Chairman, EY (1991-1994)

William Gladstone
Chairman, Arthur Young (1985-1989)
Co-CEO, EY (1989-1991)

During the 1980s, there was much speculation and some discussions on possible mergers among Big Eight accounting firms. A proposed merger of two of the firms failed to get partner approval. During this period, Ray Groves, Chairman of Ernst & Whinney, and William Gladstone, Chairman of Arthur Young, decided to become better acquainted. Then on Saturday, 11 March 1989, they met in Gladstone’s living room to discuss a possible merger. They talked about what could be accomplished and how to get there, including the need for overwhelming partner approval and consideration of US Government reaction.

The two had much to consider. According to Gladstone, “These firms were such a natural fit, complementing one another on so many levels.” Groves adds, “In so many ways, wherever Ernst & Whinney was short, Arthur Young had the part that was missing [and vice versa].”

A strong partnership

With a common vision, Groves and Gladstone led their respective organizations through a challenging and defining moment: the merger — the first among Big Eight firms and the largest of any professional services firm mergers in the world — that would forge today’s EY. Looking back, Groves reflects, “[I’d have to say] one of the key factors for the initial and subsequent success of the merger was the mutual respect and trust that Bill Gladstone and I had — and still have — for one another.”

Gladstone agrees “wholeheartedly,” adding that without such trust, the merger might never have been consummated or thereafter have achieved its full potential. “We had a lot of decisions to make,” he says. “Maybe Ray would say, ‘This partner’s really great,’ or that someone else needed more [seasoning]. Whatever the case, we respected one another’s judgment and there were no real disagreements.” That trusting relationship, according to Groves, allowed both leaders to consider what was best for the new firm rather than adopt a “What’s best for me?” approach. The latter orientation, in Groves’ mind, “too often upsets so many major business combinations.”

Commitment to clients

Groves emphasizes that it is commitment to clients that brings about ultimate success. “Great client service is essential to a professional services company,” he says. “Integrity, knowledge and a sense that we’re here for the clients — that’s got to be the tone from the top.” Says Gladstone: “We understood as we were putting this together that whatever we did, it had to focus on the needs of clients. In a professional services setting, that’s just something you can never lose sight of, in addition to your professional responsibility to the public interest.”

Back in the living room, they discussed the opportunity as well as the obstacles and related risks. By the end of this meeting, both executives were convinced that a merger was “doable.” So the two shook hands — agreeing to take further steps to explore the potential merger. And for the next three months, not a day went by when the two didn’t confer in person or on the telephone.

But by no means was the success that was to come driven by these two men alone. As both Groves and Gladstone insist, it took teamwork and commitment from dozens of partners. The concept of a Big Eight merger had been discussed by both firms’ Management Committees well before the 11 March meeting. Arthur Young also had an ancillary group known as the Board of Partners, about a dozen partners chosen for their insight and leadership qualities — whose opinions carried substantial weight with the Management Committee. Approaching this body early on, Gladstone recalls that he wasn’t sure how the concept of a merger would be received. “I was thinking, ‘These are mostly younger partners who are already established as leaders [and] that they likely would not want to do anything to disturb things.’” But to his “surprise,” the board unanimously agreed in favor of exploring a merger. Says Gladstone, “They recognized that in order to more effectively compete as a firm, they needed more behind them.”

Of course, there would also be challenges. While the two firms clearly had a great fit professionally, they featured distinctly different operating models. Whereas Ernst & Whinney was relatively centralized, Arthur Young was more of a decentralized organization, particularly in Europe. Then there were issues such as which offices to consolidate/occupy, which executives to promote “and all the thousands of other details you can imagine,” says Groves.

It would be a high climb, both leaders recognized. But at the same time, both firmly believed in the objective and devoted their energies to seeing it through.

Where are they now?

A key architect of the merger, Ray Groves is still living life and work at full bore. In addition to being a director at Boston Scientific Corporation, he has taken on the role of ombudsman at Standard & Poor’s. “It’s a new position — both for S&P and for Ray Groves,” he muses, “but I believe it’s really important.” He notes that rating agencies “are taking a lot of heat over the credit crisis.” The role of ombudsman, he says, “creates an opportunity to get everything out in the open, improving processes and rebuilding trust.”

In addition, Groves is on the board of a visiting nurse and hospice organization. “I’ve always believed that a person should give back to the community.” He’s particularly interested in evaluating technology investments that can improve healthcare. Finally, Groves takes great pleasure in his family, including his eight grandchildren.

Retiring from EY in 1991, William Gladstone has since been focusing on one of his life’s greatest loves: baseball. Years ago, Gladstone and his wife, Millie, began a collection of baseball artifacts, paintings and folk art that, by the mid-1980s, “had become one of the most important in the world,” says Gladstone. He was asked to become a member of the Board of the Major League Baseball Hall of Fame in Cooperstown, N.Y. at a time when he was not yet affiliated with baseball.

But even more exciting, Gladstone is today principal owner and president of the Troy, N.Y.-based Tri-City ValleyCats, an A affiliate of the Houston Astros. Gladstone relishes his role and works with his management team behind the scenes to help “improve the fan experience.” Just as clients are the bread and butter for EY, “fans are what drive baseball,” he says.

Gladstone also obtained funding from New York State for a new stadium to serve as the home of the ValleyCats. Situated at Hudson Valley Community College, the new stadium is helping the club set numerous attendance records. Says Gladstone, “It’s a wonderful, family-friendly form of entertainment.”

Winter 2009/2010

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