Cap Gemini Merges With EY Consulting

For months, it has been speculated that Cap Gemini would merge with Ernst & Young's consulting practice. Now, the word is that the alliance is official.

The deal is reported to be worth approximately $11.13
billion. About 36 percent of the combined group will be owned by the Big 5 firm.

Cap Gemini, a Paris-based technology company, along with EY, will enable both parties to severely strengthen their business ties overseas, especially in Germany, and improve market position in the United States.

The deal initially covers E&Y's consultancy businesses in USA, Canada, UK, Germany, France, Spain and Italy and will incorporate other countries in the coming weeks. It also has to be agreed by partner votes on a country-by-country basis. The transaction will be accounted for under the French GAAP "pooling of interest" method.

Cap Gemini will pay E&Y under a complex rolling share issue. Between a quarter and a half of the newly issued shares will be issued over the next 13 months, with the remainder subject to retention and forfeiture agreements over the next five years.

As with PricewaterhouseCoopers' decision to split accounting and auditing services from consultancy, E&Y's move was driven by the US Securities & Exchange Commission's increasingly rigourous stance on auditor independence.

KPMG, too, is keen to seek a public offering in its management consultancy wing, while Deloitte & Touche alone among the Big Five has made a public commitment to continue
as a unified accountancy-consultancy group.

As a result, the accountancy profession that will end the year 2000 will be very different to the one that started the year. Ernst & Young partners will get a steady injection of capital they can invest in developing the firm - or stash away as a nest egg. But they are likely to be left on the sidelines as Cap Gemini takes over the rapidly growing revenues from helping companies move into electronic commerce.

For the profession as a whole, consultancy drove the massive growth of the 1990s in which traditional accountancy work was seen as a loss leader to lure in more lucrative business transformation work.

More worryingly, the less profitable accountancy and advisory work struggled along at 10% growth rates or less - typically half the rate enjoyed by Big Five consultancy wings.

Though the Big Five accountancy firms will continue to work intimately with global multinationals, they are unlikely to be able to keep up with their clients in terms of revenue growth. They are also less likely to benefit directly from the initiatives and innovations of their consultant partners.

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