Risk & Compliance

Selling Andersen, Bit By Bit

Partners making deals all over the place. Also: Iomega zips away from AA, SEC settles with two CFOs, and just how big was Travelers IPO?
Stephen TaubMarch 22, 2002

It’s starting to look like a tag sale.

Executives and employees at seemingly every unit at Arthur Andersen are trying desperately to save their jobs. To do that, they are forging deals with regional units of their Big Five counterparts.

Here’s the score so far: on Thursday, Andersen’s affiliates in Hong Kong and China said they would merge with PricewaterhouseCoopers. Shortly after, Ernst & Young CIS and Arthur Andersen ZAO, the Russian units of the accounting firms, announced they plan to combine their practices. In a press release, E&Y management said it expects the merger to occur on “an expedited time track.” The new company is expected to take the Ernst & Young name. There’s a surprise.

“Ernst & Young’s firm culture is much like our own, and its international support network offers our clients the essential support they need,” said management at Arthur Andersen ZAO in the statement. “On the strength of this combination, we will be able to continue to offer professional services of the highest caliber to our clients.”

Meanwhile, Andersen Worldwide, the umbrella entity for all of Andersen’s global operations, continued to negotiate with KPMG about combining their international operations, according to published reports. Andersen affiliates in Italy and France reportedly are prepared to hook up with KPMG. Bjorn Andersen, managing partner for AA in Finland, told wire services Andersen Finland and KPMG Finland were about to begin meetings on a potential merger of the two Finnish firms, according to wire service accounts. Garrigues & Andersen, Andersen’s affiliate in Spain, has reportedly been looking to make its own deal, however.

Bear in mind that Andersen’s affiliates outside the United States are not affected directly by the Enron scandal. They are likely feeling the negative effects of the tarnishing of the Andersen brand name, though.

More Defections

Meanwhile, the domestic operations of Andersen, which was officially indicted earlier this week, continue to lose clients.

On Thursday, Iomega said it will bolt from Andersen and switch to Ernst & Young, making nearly 60 public companies that have dumped Andersen as clients, according to Auditor-Trak. Iomega, the computer storage specialist, has been using Andersen since 1980.

In a surprising twist, however, Andersen actually told Amvescap, the money-management firm, that it won’t seek reappointment as the company’s auditor, according to an SEC filing. Andersen proposed naming Ernst & Young as Amvescap’s new independent auditor for the fiscal year ending December 31.

The filing didn’t offer a reason for the resignation and said there were no disagreements between Andersen and Amvescap during the two years ended December 31, 2001.

“So far the rate of client loss is pretty much a trickle,” Robert Bricker, a professor at the Weatherhead School of Management at Case Western Reserve University, told the Associated Press. “If they can make it through proxy season, which lasts about another six weeks, and then make it through the trial, then maybe they have a shot” to survive.

Granted, losing 60 out of 2,311 publicly traded clients is hardly a mass exodus. But Andersen has lost a number of big accounts, including Merck, Delta Airlines, Wyeth, and, of course, Enron. According to Bowman’s, the recent defections have cost Andersen about $200 million in fees. That’s roughly 5 percent of the firm’s annual revenues in 2001. The percentage figures to go higher during the next few months, as well.

(To see how the Big Five firms stack up in revenues, clients, and service lines, see “Ranking the Big Five Firms.”)

Bond Investors Need Love, Too

So you thought courting Wall Street meant meeting quarterly earnings forecasts for stock analysts?

Well, General Electric learned Thursday that bond investors can also be a tough crowd to please. Reportedly, Bill Gross, PIMCO’s well-known bond guru, criticized the venerable conglomerate for aggressively using short-term borrowings to fund acquisitions, and thus goosing earnings. The big risk, said Gross, is if interest rates rise or GE is shut out of the commercial paper market.

GE’s share price closed down 20 cents a share at $38.60 on Thursday. The company’s stock traded as low as $36.83 during the session.

Like GE, a number of companies with complicated financials are being intensely scrutinized by investors. A week doesn’t go by without a rumor surfacing about Tyco International.

In response to the reports, GE CFO Keith Sherin put out a press release explaining the company’s approach to managing GE Capital’s long-term bond offerings and debt portfolio. In it, Sherin said:

  • GE is committed to maintaining its triple-A ratings and to continuing its deep and broad access to global capital markets.
  • GE Capital grew its assets by more than $50 billion during 2001. Because much of that growth came during the fourth quarter, GE Capital entered 2002 with a high proportion of commercial paper in its debt structure.
  • GE and GE Capital will continue to fund a portion of their operations with commercial paper. GE and GE Capital have the highest short-term ratings (A1+/P1). As a commercial-paper issuer, GE Capital is in the process of increasing its backup bank lines from $33.5 billion to $50 billion appropriate to current market conditions.
  • GE Capital’s target range for commercial paper as a percentage of outstanding debt is 25 to 35 percent by the end of 2002.
  • In the first quarter of 2002, GE Capital has issued $25 billion of long-term debt, largely in the U.S. market. GE Capital anticipates issuing a comparable amount in the second quarter of 2002 using both U.S. and international markets as demand warrants.
  • With the $11 billion bond issuance of March 13, GE Capital exhausted its existing debt shelf registration. Consequently, on March 20 GE Capital filed a $50 billion shelf registration.

SEC Goes After Two CFOs

The Securities and Exchange Commission filed a complaint in federal court in Phoenix, alleging illegal insider trading by John Harbottle, former chief financial officer of Interact Commerce Corp.

The complaint alleges that Harbottle learned that Sage Group Plc intended to acquire Interact in early 2001, and that he used this material, nonpublic information to trade in Interact common stock. Interact is currently a subsidiary of Sage.

The commission’s complaint alleges that, in his role as an officer of Interact, Harbottle directly participated in discussions between Interact and Sage in February 2001 concerning a potential corporate transaction. Harbottle also apparently attended a meeting of Interact’s board of directors on February 13, 2001, during which the board and senior management discussed Sage’s potential interest in acquiring Interact.

“The Board specifically instructed Harbottle to hire investment bankers to evaluate the potential Sage proposal and to investigate other acquisition possibilities on behalf of Interact,” noted the SEC.

On March 28, 2001, Interact announced that Sage had offered to acquire the company for $12 per share. Interact stock rose 48 percent, or $3.87 per share, on the news.

The SEC alleges that Harbottle purchased 5,000 shares of Interact stock in his personal brokerage account on February 14, 2001, the day after the board meeting, and made an illegal profit of $16,969 when he later sold the stock.

Harbottle agreed to disgorge his trading profits with prejudgment interest, and will pay a civil penalty of $25,000.

Elsewhere, the SEC initiated civil litigation against Harold J. Macsata, the former CFO and treasurer at USA Detergents Inc. The commission alleges that he violated, or aided and abetted violations of, the antifraud, periodic reporting, corporate record-keeping, and lying to auditors provisions of the federal securities laws by resorting to fraudulent methods to increase USA Detergents’s reported income during the third and fourth quarters of the December 31, 1996, fiscal year.

Macsata, without admitting or denying the commission’s allegations, consented to entry of a final judgment that would enjoin him from future violations of the federal securities laws and order him to pay a civil money penalty of $50,000.

USA Detergents was a manufacturer and marketer of laundry and household cleaning products. In May 2001, the company was acquired by Church & Dwight Co.

“As a result of the fraudulent acts, USA Detergents filed with the Commission and released to the public a quarterly report for its third quarter of 1996 and an annual report for its 1996 fiscal year that included financial statements that materially misrepresented the company’s results of operations, significantly overstating its income,” according to the SEC.

The commission also instituted and simultaneously settled administrative proceedings against seven other former members of USA Detergents’s management.

Financing News

  • Travelers Property Casualty Corp. late Thursday sold 210 million shares for $18.50 apiece, raising $3.88 billion in its initial public offering, making it the biggest IPO this year. Travelers’s expected market value of $18.5 billion would make it the nation’s second-biggest publicly held insurer, behind AllState Corp.
  • The share price of Alcon Inc., the world’s largest maker of eye-care products, rose a buck to $34 in its first day of trading. Swiss giant Nestle sold 69.75 million Alcon shares, or 23 percent of the company, at $33 per share late Wednesday in the IPO.