Ernst & Young may sell consulting unit to Cap Gemini

The New York-based firm confirmed in a statement that it is currently in discussions with Cap Gemini and said that if a deal is completed, "the combination of the two entities would create a world leader with more than $8.5 billion in revenues."

The discussions between the firm and Paris-based Cap Gemini come at a time when a growing number of professional services firms, especially those in the Big Five--Andersen, Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers--have been muddling through ways either to take their consulting units public or increase efforts to keep them separate from other units such as auditing, accounting and corporate finance.

The consulting unit, Ernst & Young Consulting Worldwide, which specializes in corporate operations and information technology, generated about $4 billion of the $10.9 billion in total sales in fiscal 1998, an Ernst & Young spokesman told Reuters.

Still, analysts have said that separating such a firm's consulting side from its accounting side is a challenge. Besides the reluctance of accounting to let consulting fly solo, the larger issue remains that an accounting firm cannot provide professional consulting services to clients that it audits. Breaking away completely with a Cap Gemini merger could help Ernst & Young avoid some of those conflicts of interest.

For Cap Gemini, a company that reportedly for some time has been seeking a U.S.-based partner in order to boost its global presence, a possible decision to buy Ernst & Young's consulting business isn't far-fetched. In recent months, the company has also been rumored to be in talks to acquire struggling systems integrator and professional services firm Cambridge Technology Partners. In April, Cap Gemini bought U.S.-based telecommunications services company Beechwood to boost the clout of its American arm, Cap Gemini America. Cap Gemini Group is worth approximately $5 billion and has about $643 million in U.S. revenues.

Commenting on the possible combination of the two companies, Ernst & Young CEO Philip Laskawy said in a statement, "Given the dramatic impact of the Internet and e-business on the professional services field, we are pursuing a possible strategic combination with Cap Gemini, a global leader in management consulting and information technology services."

Laskawy added, "We see this potential combination as an opportunity to enhance our ability to serve our clients and provide a continuing dynamic environment for partners and employees."

At this point, the firm said discussions with Cap Gemini are continuing, and no further details are expected. The firm also said that there can be "no assurance" that a deal will be reached or, if so, when it would be reached.

Tom Rodenhauser, an analyst who heads ConsultingInfo.com, said the biggest challenge both companies would face is getting all of Ernst & Young's partners to back the deal.

While this is a large issue, Rodenhauser added, "You're looking at a one-time payoff to the partners that can be enormous--and that's really what's driving this."