VideoAs CFO.com reported last month, many industry watchers believed Big Five accounting firm PricewaterhouseCoopers would benefit the most from the troubles at Arthur Andersen. After all, PwC is the largest professional-services firm in the world, and some analysts believed Andersen's woes would trigger a "flight to size" among its clients.
But during the past few weeks, KPMG—the smallest of the Big Five firms in the United States—has started picking up a considerable number of former Andersen audit accounts. In fact, KPMG has been winning the business of several defecting Andersen clients each day.
Moreover, KPMG has been scooping up entire Andersen regional offices. So far, the firm has absorbed six.
On Wednesday, KPMG reportedly moved closer to linking up with several others. According to the Associated Press, KPMG has a tentative deal involving about 150 partners and 2,000 employees in Seattle; Portland, Ore.; Salt Lake City; Boise, Idaho; San Francisco; Los Angeles; Boston; and Philadelphia.
"Any transaction that we would consider would be consistent with the reforms we've outlined and part of our plan to move forward with the audit firm of the future," Andersen spokesman Patrick Dorton told the wire service. Part of that plan, as promulgated by interim Andersen overseer Paul Volcker, is to scale back the firm's consulting operations, sticking instead to audit and tax.
If the KPMG deal goes through, it remains unclear whether the defecting Andersen partners would retain their partner status at KPMG. To become a partner at a Big Five accountancy, employees must take an equity stake in the firm.
Meanwhile, yesterday KPMG picked up another round of Andersen clients. The new accounts include Halliburton Co., Estee Lauder Cos., John Wiley & Sons, and IPC Holdings Ltd. As with most other Andersen jumpers, all of these companies said they had no disputes with the embattled firm.
All told, Andersen has now lost 219 audit clients since the beginning of the year. That works out to about 10 percent of the firm's 2001 audit clients, according to data provided by industry tracker Bowman's.
Interestingly, KPMG's audit and accounting practice makes up about 61 percent of the firm's U.S. revenues. In fact, the firm actually generated more fees from its domestic audit/accounting practice last year than Andersen, even though Andersen has a larger overall U.S. operation. According to Bowman's, KPMG's audit/accounting practice produced nearly $2 billion in revenues in 2001; Andersen's audit/accounting practice brought in around $1.7 billion. PwC maintains the largest audit/accounting practice in the United States, with 2001 revenues of $2.8 billion.
It's not certain if the Andersen acquisitions and pickups will push KPMG up the Big Five leader board. The firm will no doubt surpass a stripped-down Arthur Andersen—if Andersen indeed survives its battles with the Department of Justice and Enron shareholders. Ernst & Young is number three on the list of Big Five firms, with domestic revenues of $4.1 billion in 2001. KPMG did $3.2 billion in business in the United States last year. In terms of income, however, KPMG has a larger global business than Ernst & Young. Hence, bulking up its U.S. operation makes sense.
(To see how the Big Five stack up in U.S. revenues and size or practices, see click here.)
KPMG did have one setback on Wednesday, however. Managers at Andersen Worldwide's French operations announced they have terminated talks with the company. Instead, Andersen Worldwide's French unit will merge with Ernst & Young France.
Other Andersen Defections
Perhaps the highest-profile company to defect from Andersen on Wednesday was global media giant News Corp.
The company, headed by the redoubtable Rupert Murdoch, appointed Ernst & Young as its auditor for the fiscal year ended June 30, 2002.
Two companies dropped Andersen yesterday in favor of PricewaterhouseCoopers: Paxar Corp. and W-H Energy Services Inc.
Paxar, which makes identification products for the apparel and textile markets, said it now plans to change its auditor every seven years and Andersen had been its auditor for more than seven years, according to a filing back in February.
Financing News
>> Management at MedcoHealth Solutions Inc., the pharmacy-benefits management unit of Merck and Co., informed the Securities and Exchange Commission that it plans to take the company public in a $1 billion offering of common stock.
The preliminary IPO prospectus did not disclose the number of common shares to be issued, nor did it disclose the price range. The underwriting will be managed by Goldman Sachs Group, J.P. Morgan Chase & Co., Merrill Lynch & Co., Credit Suisse First Boston, Deutsche Banc, and Salomon Smith Barney, a unit of Citigroup.
Merck will retain at least an 80.1 percent stake in the company after the IPO is completed. Management at Merck plans to issue the rest of the MedcoHealth stock to its shareholders in a tax-free transaction within 12 months.
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