KPMG leads way to the Street

KPMG this week incorporated its consulting unit, the first step toward a public offering. For months, KPMG has talked about spinning off the unit, a move that could serve as a litmus test for its rivals, including Deloitte & Touche, Andersen Consulting, Pricewaterhouse Coopers and Ernst & Young, commonly referred to as the Big Five.

All of the accounting/auditing firms operate consulting practices that are struggling to find their place in the new Net economy. These established companies have suffered a talent exodus in recent months as executives have fled for dot-com start-ups that can offer lucrative option packages. An IPO is a chance to raise the company's recruiting capabilities and build its image as a firm that can transform a Fortune 500 company's business into a Net play.

Pricewaterhouse Coopers has been studying ways to restructure its various consulting businesses. Andersen, meanwhile, has already separated its consulting division from Arthur Andersen.

When KPMG Consulting files to go public, perhaps as early as this spring, its parent company will be able to sell up to 49 percent of the firm--enough to still retain control, yet forever change the firm's entrenched culture under which equity partners make all major business decisions.

"If KPMG can make the plan work, others will follow," said Meta Group analyst Stan Lepeak.

George Ledwith, head of corporate communications at KPMG, which recently received a $1 billion investment from Cisco Systems, said an IPO will provide a new capital source, as well as help the company recruit and retain consultants.

"It (will help) KPMG to be as flexible as any start-up in the Net integration space," he said. About $2 billion of KPMG's fiscal 1999 revenues--about $4.7 billion--came from consulting services, he said.

Analysts say KPMG's move to take its consulting arm public is yet another sign that the services industry is in flux, and is concerned with conflict of interest issues that could arise between auditing firms and their fast-growing consulting arms.

Arthur Bowman, an accounting industry analyst who publishes Bowman's Accounting Report, says that Andersen is the only member of the Big Five that has clearance from the Securities and Exchange Commission to enable its accounting side, Arthur Andersen, to do business with Andersen Consulting's clients. Other firms continue to struggle with the issue.

Overall, consulting divisions of Big Five firms are growing too large to easily tackle potential accounting and auditing conflict issues, analysts say, leading these firms to examine ways to restructure. Pricewaterhouse Coopers, for one, is expected to announce a restructuring within the next two months, though the company is mum on details and says that any decision made is unrelated to both KPMG's IPO plans and auditing and accounting issues.

"There's not a lot that we can say about it until the decision has been reached," said company spokesman Steven Silber, who again denied recent rumors that Pricewaterhouse Coopers consulting is in talks to possibly merge with IBM. Global revenues for Pricewaterhouse Coopers' management consulting services division represented about $5 billion, or 36 percent, of the company's $17.3 billion in revenues in fiscal 1999, Silber said.

KPMG Consulting has about 17,000 employees in 160 countries and plans to hire 4,000 more over the next 18 months to help support Cisco's business. Under a newly-inked alliance Cisco will own nearly 20 percent of KPMG Consulting.

Tom Rodenhauser, an analyst at ConsultingInfo.com who tracks the Big Five, said the timing couldn't be better for a Big Five firm to file for an IPO--or to split from its accounting arm. Many services firms, though a fraction of the size of the Big Five giants, have all enjoyed high-flying Wall Street runs since their IPOs last year.

On the down side, KPMG will not be perceived by investors to be as nimble as start-ups such as Scient and Viant, Rodenhauser said, adding that an IPO creates new pressure for any company.

"It changes what consulting is all about," Rodenhauser said. "If you're a public firm, the investors scream bloody murder if you lose a client."

Meta's Lepeak said KPMG, as a public firm, would need to do a lot of internal reengineering, revamp their marketing efforts and continually sell themselves to investors.

"It's going to be tough for these firms to be in an open environment," added Lepeak. "It's not going to be easy, but right now is the time to do it."

News.com's Melanie Austria Farmer contributed to this report.