C & L'S BUYOUT OF KWASHA BOOSTS COMPETITIVENESS

FORT LEE, N.J.-The benefit consulting landscape continues to change after the second buyout this month of a venerable consulting firm by a much larger organization.

Kwasha Lipton L.L.C. is being acquired by Big Six accounting firm Coopers & Lybrand L.L.P., which will merge the consultant into its Human Resource Advisory Group, ranked as the fifth-largest benefit consultant before the deal.

The merger, which is for an undisclosed amount, could be completed as early as next week.

That combination comes only weeks after Mellon Bank Corp. bought eighth-ranked Buck Consultants Inc. in the first acquisition of a major benefit consultant by a financial services firm (BI, Jan. 6).

While the Kwasha Lipton name will be maintained as The Kwasha Lipton Group-which will comprise the combined entity's retirement and benefits administration services-the takeover means an end to independence for one of the oldest and most respected names in employee benefits consulting.

The merger could produce a benefit consulting powerhouse, executives at the two firms say.

The deal brings Coopers &*Lybrand a consulting firm highly regarded for customer service and innovation.

"This combination creates unique levels of depth. It is an opportunity to become world-class," said Reed Keller, vice chairman of Coopers & Lybrand Human Resource Advisory Group in Atlanta.

For Kwasha Lipton, the merger gives it a link to an organization whose parent-Coopers & Lybrand L.L.P.-has enormous resources worldwide.

"This combination is about the future and having the resources to meet new opportunities," said Kwasha Lipton Chief Executive Officer Robert S. Byrne Jr.

Coopers & Lybrand's Human Resources Advisory Group generated an estimated $363 million in benefit consulting revenues in

1996, including $177 million from U.S. benefit consulting. Kwasha Lipton reported $79 million in 1996 revenues (BI, Dec. 9, 1996).

The deal also joins Kwasha Lipton to a firm that has moved into several consulting areas, most notably broad human resource consulting, which employers are demanding and in which Kwasha Lipton is not a significant force.

Outside observers agree the two firms appear to make a good fit.

"By consolidating entities in the same field, you build mass and capability. That should mean better service at equal or lower cost," said Dallas Salisbury, president of the Employee Benefit Research Institute, a benefits think-tank in Washington.

Some Kwasha Lipton clients look forward to the combination, saying it will enable Kwasha Lipton to expand operations, most notably in benefits outsourcing.

"We know that Kwasha Lipton has wanted to expand outsourcing beyond pension and savings plans to full human resources consulting. The combination positions them with the capital to make the investment," said Pete DiToro, vp-employee benefits at San Francisco-based BankAmerica Corp., one of Kwasha Lipton's biggest clients.

The Coopers & Lybrand and Kwasha Lipton merger comes on the heels of this month's acquisition of Buck Consultants by Mellon Bank.

The successive acquisitions illustrate the tremendous changes and pressures buffeting the benefit consulting industry.

Most of the major benefit consulting firms, including Kwasha Lipton, began as actuarial consultants. For decades, the consulting firms had that business virtually to themselves and enjoyed huge profit margins, observers says.

The growth of 401(k) retirement savings plans in the early and mid-1980s gave consultants added opportunities in areas like recordkeeping and benefit communications.

And legislators in Washington, through the passing of a plethora of benefits-related legislation throughout the 1980s, drove more consulting growth, as employers sought the specialized expertise of benefit consultants to meet Washington's dictates.

But those engines of revenue growth, as EBRI's Mr. Salisbury calls them, have begun to sputter.

While Congress continues to pass legislation affecting employee benefit plans, the measures of recent years have not required the massive compliance work imposed by bills passed in the 1980s.

More significantly, profit margins from actuarial consulting on defined benefit pension plans-once a huge money machine-have shrunk significantly in recent years as technological advances have enabled employers to do much more of that work themselves. In addition, few if any defined benefit plans are being established, while thousands are being terminated each year.

Actuarial valuations, for example, have become much more of a commodity, benefit consultants say, driving down the rates consulting firms can charge.

At the same time, mutual funds, starting about five years ago, began to move into defined contribution plan recordkeeping, communications and administration services in a big way.

The mutual funds became formidable competition for the consulting firms because the funds could not only provide these administration services-at relatively low cost to employers-but also provide their funds as investment options in the savings plans.

At the same time, the mutual funds, with their huge capital bases and thousands of clients, had the resources to invest heavily in technology and were able to offer state-of-the-art services like voice response systems and daily valuation of employees' account balances.

For benefit consultants, the price of keeping up with the mutual fund giants has been steep.

"If you have a small client base, how do you compete against a mutual fund with" thousands of accounts, Mr. Salisbury noted.

In addition, employers, eager to slim down their own benefits departments, have led the charge to outsource the administration of their benefit programs, as well as other human resources functions.

But the cost of developing and keeping up-to-date outsourcing centers can be beyond the reach of smaller benefit consulting firms like Kwasha Lipton, said Donald Light, an independent consultant in Menlo Park, Calif.

"Kwasha Lipton may be a wonderful firm, but its ability to finance the level of research and development needed for outsourcing is limited," Mr. Light said.

Kwasha Lipton's Mr. Byrne agreed that Kwasha Lipton lacked the resources to expand into new areas like, for example, broad human resources consulting and that more potential business opportunities would have been lost in the future.

"We needed a broader base," Mr. Byrne said.

Because of Kwasha Lipton's structure-it has one central consulting office in Fort Lee, as well as outsourcing centers in Fort Lee and Raleigh, N.C.-the merger is likely to be integrated with Cooper's & Lybrand's 23 offices more smoothly than most such deals.

"Consultants can spend time serving clients rather than worrying about which offices will be closed," Mr. Salisbury said.

Neither firm plans to lay off professional staff or close any offices as a result of the merger.