Friday Sept 16 2022
EY will take its new separate consulting firm public if partners approve the deal. The WSJ article indicates EY will borrow $ 13 B to help fund the operation.
The state of the world economy does not strike me as conducive to going into a lot of debt. Fed Ex shares dropped 18% on after market trading yesterday, more than their drop in the 1987 crash. And EU delivery counterparts dropped as well. The world economy is slowing.
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Strong competition and a slowing economy could pose challenges for Ernst & Young as it looks to stand up a separate consulting brand as part of the planned split of its business.
EY’s leaders last week approved separating the professional-services firm’s consulting and auditing businesses. The move would result in the breaking off of the faster-growing consulting business, which advises on tax issues, deals and corporate strategy. The proposed breakup “provides tremendous opportunities for our people, our clients and our partners,” Carmine Di Sibio, EY’s global chairman, told The Wall Street Journal last week.
PricewaterhouseCoopers, KPMG and Deloitte—the other Big Four accounting firms—have said they don’t intend to pursue a similar split. Deloitte is a sponsor of CFO Journal.
EY plans to raise roughly $11 billion through an initial public offering of a 15% stake in the consulting firm, as well as about $13 billion in net debt to fund the transaction. The plan now heads to a vote with the firm’s 13,000 partners, which is expected to begin later this year and wrap up by January or February. The company, which like the other Big Four is structured as an international network of private partnerships, would then prepare the consulting business for an IPO late next year.
The separation would free up EY’s consultants to seek a bevy of new clients they previously couldn’t serve due to independence rules that limit what kind of tasks accounting firms can handle for audit clients.
Under the Sarbanes-Oxley Act of 2002, accounting firms that audit a company’s books are prohibited from providing certain consulting services, for example implementing new software for a client. “Systems design and implementation is one of the most lucrative consulting opportunities,” said Elizabeth Cowle, an assistant accounting professor at Colorado State University.
The global technology consulting sector was worth $350 billion last year, while the professional-services market was valued at $1.1 trillion, advisory firm Source Global Research said.
The consulting business, once separate, will continue to invest in technology to expand its offerings to clients, EY said, declining to provide specifics. The consulting-only firm plans to focus on winning new clients in areas such as technology, financial services, private equity, government and life sciences, EY said. About 75% of its tax practice will become part of the consulting firm, while the remainder will remain part of the auditing business, which will also offer some tax and advisory services, EY said.
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