As an alternative to the offer from Deloitte & Touche (D&T), Andersen is considering a management-led leveraged buy-out (LBO) of its entire tax practice. The proposed transaction would help stem layoffs, and it presents clear benefits for Andersen. But there are also risks associated with this ground-breaking transaction that could alter the future of the entire profession.
In a memorandum of intent delivered to Andersen only days after the D&T offer was announced, San Francisco LBO firm Fox Paine & Co. offered to acquire Andersen's entire tax unit in an LBO for $800 to $900 million. The transaction, which is supported by a group representing the firm's 450 tax partners, would provide job security for approximately 4,000 tax professionals and support staff, as well as the partners. In contrast, the offer from D&T is for a portion of the practice, and the fates of individual partners and staff are still being determined through an interview process.
A successful LBO would make more funds available to the U.S. firm than a partial sale to D&T, and it would give the partners more control over future decisions. As with other deals, this one would be dependent on assurances that Enron-related liabilities would not be transferred. Presumably, the residual audit practice would file for bankruptcy protection to provide the necessary liability protection.
Perhaps the most ground-breaking aspect of the proposed transaction is the fact that it would establish whether or not the tax practice could exist separate from an audit practice. Andersen's tax unit is reported to be one of the firm's highest profit margin businesses. But, traditionally, audit and tax practices have worked together.
In testimony to Congress, other accounting firms have argued that it makes sense to split audit and some types of consulting services. But many have argued that it would not be economically feasible to separate audit and tax. If Andersen's tax partners can make this arrangement work, it will set very interesting precedent that could well influence current and future audit reform initiatives.