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IPO Focus: Big Five
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December 1, 2000: 11:49 a.m. ET
PwC, the biggest of the Big Five accounting firms, looks to IPO market
By Staff Writer Luisa Beltran
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NEW YORK (CNNfn) - PricewaterhouseCoopers, the biggest of the Big Five global accounting firms, is still eyeing an IPO of its consulting unit even though the market for IPOs, especially consulting issues, has waned, a source close the situation said.
PwC is looking at all its options, including going public with its consulting unit, as it restructures, the source said. Rival KPMG Consulting, whose own road to an IPO took over two years, is expected to float its own issue next year.
Andersen Consulting, which split from parent firm Andersen Worldwide, which also owns Arthur Andersen, earlier this year, is also investigating a partial public offering.
Andersen partners will meet again in mid-spring to vote on whether to launch an IPO, an Andersen Consulting spokeswoman said. Andersen, which will soon be known as Accenture, is now proceeding with the analytical, legal, financial and regulatory work needed to consider the move.
Too late?
KPMG and PwC's strategies come in a precarious time in the IPO market. Fourth quarter has traditionally been considered the strongest time for IPOs but this year the market for new issues has all but ground to a halt. About a dozen new issues are expected to open the rest of this year, the slowest time period since December 1987, said John Fitzgibbon, editor of WorldFinanceNet.com.
On Thursday, the Nasdaq Composite plunged to its lowest point in 15 months, dropping 108.93 point, or 4 percent, to 2,597.98. So far in the fourth quarter, 66 companies have pulled their planned IPOs, according to data from CommScan, a New York-based investment banking research firm.
"This is not a strong time to take someone public," Fitzgibbon said.
The market for consulting IPOs has been flooded since the spring, analysts said. Consider the fate of the Boston-based Digitas Inc. (DTAS: Research, Estimates). The firm, believed to be one of the last strong consulting IPOs, rose 23 percent in its March 14 debut when it sold 9.3 million shares at $24. Shares have fallen 77 percent to $5.56 Thursday.
"To go out now would be ridiculous," said industry watcher, Art Bowman, of Bowman's Accounting Report.
While money may be motivating these firms to access the capital markets, the Big Five firms -- which include Deloitte & Touche, Arthur Andersen, Ernst & Young as well as PwC and KPMG -- are just too late, insiders said.
"There are a few bright people in the firms that recognize trends," said Dan Saint, a former Deloitte & Touche partner who is now CFO of San Francisco-based Xuma.com, an infrastructure provider. "But by the time they get it through their sloggy bureaucracy the market has moved."
It usually takes a company from the first moment it files with the SEC about eight weeks to open for trade, analysts said. While KPMG has moved the quickest to an IPO, filing last May, the global firm has sat in SEC registration for the past seven months.
"KPMG was on top of recognizing the trend but it doesn't take that long to go to market," Saint said. "All these firms have stories. They could have moved a lot quicker."
PwC still for sale?
New York-based PwC, the biggest of the Big Five accounting firms, is considering selling its consulting unit or finding a strategic investor as well as separating its human resources and outsourcing units from the audit side, the source said.
On Nov. 13, Hewlett-Packard ended talks with PwC that would have had the computer maker paying $17 billion to $18 billion for the accounting firm's consulting unit.
"Now that the HP deal is not going to happen, an IPO is one of the options," the source said.
Even though Hewlett-Packard (HWP: Research, Estimates) walked away, PwC is still considering selling the business, the source said. HP ended talks after apparently failing to reach agreement on a price for the unit and in response to concerns about its ability to retain PwC consultants after the transaction, industry watchers said.
However, there is no timeframe on PwC to implement any of the options.
On Nov. 16, the Securities and Exchange Commission voted unanimously to limit the types of consulting work that accounting firms can do for their audit clients. The ruling was seen as a win for the Big Five since the SEC had initially wanted to ban firms from providing lucrative information technology (IT) services to audit customers.
"The SEC rule doesn't change things a lot," the source said. "The rule requires more input from audit committees but it doesn't require firms to not provide [consulting] services to attest clients."
If PwC does eventually sell, it will follow a similar route chosen by rival Ernst & Young which sold most of its consulting unit to Cap Gemini, a French computer services and advisory firm, for nearly $11.3 billion.
PwC originally announced its plans to restructure in 1999 and now that the HP deal fell through, it is again looking at selling or going public with the consulting unit. The global accounting firm will eventually follow through on its plans to sell the consulting unit or pursue its IPO plans, said industry watcher Art Bowman, of Bowman's Accounting Report.
However, a sale hinges on finding a company large enough and with enough capital to buy PwC, with had about $17 billion in 1999 sales. Technology heavyweights such as International Business Machines Corp. (IBM: Research, Estimates), Sun Microsystems Inc. (SUNW: Research, Estimates) and Dell Computer Corp. (DELL: Research, Estimates) have been suggested as likely buyers.
"There is no doubt that PwC wants to do something," Bowman said. "They are open to all sorts of things but they are not sure how ownership structure will work out. There is a 'For Sale' sign up over there."
The KPMG Consulting IPO
KPMG Consulting will probably launch its IPO next year even though the company insists there is still time this year to float an offering, insiders said.
"The window is still open to do [the IPO] this year," said KPMG Consulting spokeswoman Elizabeth Brooks.
However, Brooks added that she would "be surprised, given the market, if we actually were ready to push it out there."
Mclean, Va.-based KPMG Consulting, which plans to sell 367 million shares at $6.75 to $8.75 via lead underwriter Morgan Stanley Dean Witter, has been negotiating with the SEC for over two years. The new issue, which has been in the works since fall 1998, would be the first time a unit of a global accounting firm would attempt to launch its IPO.
The process of going public is much more complicated for KPMG Consulting since it is being spun-off from a tax and audit firm, the KPMG spokeswoman said. KPMG Consulting filed in May for its IPO.
In 1998, KPMG indicated that it would be looking to restructure to separate the consulting unit from the core audit business. Similar to PwC's current strategy, KPMG said at that time that it would consider a strategic investor, selling the practice and/or an IPO.
In December 1999, KPMG eventually sold a near 20 percent stake in the consulting unit to Cisco Systems (CSCO: Research, Estimates) which was then cut to 10 percent. KPMG LLP, the parent firm, will also hold a 20 percent stake after the IPO but plans to divest those shares.
Industry watcher Art Bowman believes that KPMG Consulting will still go through with its IPO plans and that chances of a withdrawal are small.
"I hope KPMG is doing it for the right reasons and not because the train has gone too far to turn around," he said.
Anyone else?
Of the Big Five, only Arthur Andersen and Deloitte & Touche want to stay traditional accounting firms, with includes providing consulting and attest services.
Deloitte & Touche has not even considered selling its consulting unit, or an IPO or finding a strategic investor, said company spokeswoman Deb Harrington.
"One of our major purposes in discussing with the SEC was to keep the firm together," she said. "We believe that a multidisciplinary firm is a better way to serve clients than separated."
Deloitte partners have considered splitting off the consulting unit in an IPO but have chosen to stay together, a source close to the firm said.
Arthur Andersen, which recently split from its jealous sister Andersen Consulting, also won't be looking to access the capital markets or sell.
"We're very committed to the partnership model and have no plans at all at this stage for going public with all or any part of our business," said Andersen spokesman Mike Hatcliffe.
Arthur Andersen, now the smallest of the Big Five, lost its CEO Jim Wadia after the arbitration and many believe the firm has been too consumed with its divorce from Andersen Consulting to consider anything else. 
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