KPMG's ongoing stab at an initial public offering is raising the larger question of whether any of the other privately held Big 5 accounting firms will turn to an IPO to raise more cash and lure talent.
KPMG's move comes at a time when revenues within the Big 5 companies are shifting. Although accounting revenues still represent the lion's share of profits for these closely held firms, their consulting businesses are growing at a rapid 35 percent rate, compared with a 10 percent growth rate on the financial side, said industry analyst Tom Rodenhauser of Consulting Industry Services.
"[Consulting] is leapfrogging ahead," he said. "Within the next five years you'll see a balance between the two sides."
Industry observers say a spin-off of its consulting practice would not only enable KPMG to offer its employees stock options, but would also lend the cash it requires to invest in building a heftier outsourcing practice.
But there are conflicts of interest that stand in the way of any IPO by the Big 5 professional services firms--comprised of KPMG, PricewaterhouseCoopers, Ernst & Young, Andersen, and Deloitte & Touche. Besides the reluctance by the accounting side to let the consulting side fly solo, the larger issue remains that a publicly owned accounting firm cannot provide professional consulting services to clients that it audits.
For the past year, KPMG has talked about spinning off part of the company and taking it public. A reaffirmation
of that intention came with Cisco's $1 billion investment in KPMG, which was announced over the weekend. KPMG plans to incorporate its consulting practice first and follow up with an IPO, pending the approval of the Independence Standards Board, the regulatory body that is expected by spring to decide on whether KPMG can file for the IPO.
Meanwhile, industry observers are still speculating whether any of the other professional services firms will follow KPMG's lead.
PricewaterHouse Coopers is making a bigger effort of late to sell its financial and consulting services as part of a package, a strategy the firm tried several years ago. As a result, analysts say the company isn't expected to separate its consulting business any time soon.
Andersen Consulting, with $8.3 billion in 1998 revenues and about 1,500 partners getting a piece of the profits, is an unlikely IPO candidate as well. Andersen's CEO George Shaheen has opposed any move in that direction, despite that it could allow already rich partners to get "filthy rich," according to one analyst.
Others said Andersen has no need to go public.
"I think that Andersen is wildly successful right now," said Julie Giera,
analyst at Giga Information Group.
"They're not having any problem with attrition and their partners are paid extremely well."
Giera noted that Andersen's recruiting strategy is also quite different from
that of KPMG's, which makes KPMG a more logical candidate for a spin-off.
While Andersen recruits young MBAs fresh out of business school who pick
the firm for the experience and the name, KPMG tends to draft more seasoned
industry consultants who are demanding stock packages, she said.
"Everyone knows an [Andersen] IPO would be worth a ton of money," said Hurwitz Group analyst Bill Martorelli. But if the partners and chief executive Shaheen don't want it, it's not going to happen, he said.
If they remain private, he said, they don't have to worry about losing consultants to competitors when the stock market dives, he said.
But Andersen and others are already losing talent to start-ups because they can't offer the stock options, Rodenhauser argued.
"It's become a problem for them," he said. Before, Andersen competed head-to-head for talent with the investment banking community, he said. Now, the company has the added worry of competing with the start-up as well. Spinning off the consulting business and taking it public could be a way to help stop those defections, though many moves in that direction are unlikely, he said.
"They're looking at that now, but it's something that I don't think any of the accounting firms will allow," he said. "There's still a tenuous umbilical cord between the two and the consulting side makes big money for the whole. I don't think the accountants will allow the consultants to walk out the door."