IT services provider KPMG Consulting has signed a letter of intent to acquire most of Andersen Worldwide SC's IT services operations.
The deal will significantly expand KPMG Consulting's offering portfolio, staff, market share and list of clients, putting it in a better position to compete against other IT services providers, such as IBM, Electronic Data Systems (EDS), Computer Sciences Corporation, Deloitte Touche Tohmatsu's Deloitte Consulting unit and PricewaterhouseCoopers' PwC Consulting unit.
"We clearly saw the complementariness and the added strength of our two businesses," KPMG Consulting chairman and chief executive Rand Blazer said during a conference call Wednesday morning to discuss the proposed deal.
KPMG Consulting is offering US$284 million to buy up to 23 of Andersen Worldwide's business consulting units, which provide IT and business management services. Up to 6.5 million of KPMG Consulting shares would also be issued over a three-year period to Andersen consulting partners who join as part of the transaction. KPMG Consulting's shares were at $17.40, up 15.6 percent, in late afternoon trading Wednesday.
The deal would be complementary both in terms of industries and geographies, Blazer said.
In terms of industries, KPMG Consulting is strongest in the public services, communications and content, and financial services industries, while the Andersen Worldwide units would provide a boost in industries such as pharmaceutical, utilities, biotechnology and consumer and industrial markets, Blazer said.
"The combined company would have great balance in the targeted industries we serve," he said. "It's a very good fit between us, very complementary."
In terms of geographies, "there's also a tremendous fit," he said.
Clients of the Andersen Worldwide units would benefit from dealing with KPMG Consulting, which is a stable company, as opposed to Andersen Worldwide, whose environment is very disruptive currently, said Yankee Group analyst Andy Efstathiou.
The move is also a good one for KPMG Consulting, he added.
"KPMG Consulting wants to grow aggressively, and their business lines are very complementary," he said.
The letter of intent includes the business consulting unit from Arthur Andersen LLP, which is Andersen Worldwide's U.S. firm. The other units on the table are in Asia-Pacific, Europe and Latin America and include units in countries such as France, Germany, Spain, Japan, Brazil and México.
Meanwhile, KPMG Consulting Australia refused to comment on the impact of the deal on the local market, nor would they discuss staffing arrangements at both firms under the acquisition, saying they were not permitted.
KPMG Consulting already has completed the acquisition of two of the 23 units on the table: the China and Hong Kong IT consulting practices.
The 23 units generated $US1.4 billion in revenue in Andersen Worldwide's 2001 fiscal year, ended Aug. 31, 2001. That is about half of KPMG Consulting's total revenue of $US2.9 billion in its 2001 fiscal year, ended June 30, 2001. KPMG Consulting's staff would grow from about 9,000 to more than 16,000 employees if it manages to acquire the 23 units it intends to buy. KPMG Consulting's list of clients that are among the largest 2000 companies in the world would grow to more than 700 clients, up from 531 at the end of its 2001 fiscal year, Blazer said.
Switzerland-based Andersen Worldwide, and its U.S. firm Arthur Andersen LLP, based in Chicago, are struggling to survive their involvement with bankrupt energy trader Enron. Arthur Andersen LLP was Enron's auditor, and Enron's accounting practices are at the center of the scandal that brought down the company.
As a result of the Enron debacle, Arthur Andersen LLP faces numerous lawsuits, a criminal trial on an obstruction of justice charge and a client exodus. It pledged earlier this year that it would transform itself into a company that provides only auditing services and that it would get rid of its other consulting units.
KPMG Consulting's acquisition of Arthur Andersen LLP's business consulting unit depends on Arthur Andersen LLP resolving "in the most prudent and most effective way" the liability issues it faces, Blazer said.
"A prerequisite for us ... is that major liability issues be resolved to our satisfaction prior to close," he said. "We understand very clearly the potential liabilities ... (and) we're not interested in putting our shareholders or our population at risk."
The US unit is the largest of the 23 included in the letter of intent, an Andersen Worldwide spokeswoman said Wednesday.
Still, even if KPMG Consulting ends up deciding against acquiring the Arthur Andersen LLP unit, nabbing the other units would make the deal worthwhile, Yankee's Efstathiou said.
KPMG Consulting has set a timetable of 30 to 45 days for reaching definitive agreements with the Andersen Worldwide units that still haven't signed one, and to close the deals by this year's third quarter, Blazer said.
Andersen Worldwide is the latest Big Five accounting firm to break away from its IT and business consulting units to avoid compromising the independence of its auditors and getting into conflicts of interest, a big criticism that has been leveled at Arthur Andersen LLP for providing both auditing and consulting services to Enron.
KPMG Consulting is a publicly traded company no longer associated with its former parent company, Big Five accounting firm KPMG International. Another Big Five accounting firm that got rid of its IT and business consulting unit was Ernst & Young International, which sold its IT and business consulting unit to Cap Gemini in 2000. PricewaterhouseCoopers is following suit by spinning off PwC Consulting via an initial public offering in August, while Deloitte Touche Tohmatsu earlier this year announced it would in some way separate from its business and IT consulting unit Deloitte Consulting.