Is A Big 4 Firm Buying BearingPoint?

By • Mar 24th, 2009 • Category: Pure Content, The Big 4 And Consulting

Update: March 24, 2009
Looks like I was right.  Twice. See new comments posted overnight for more details and a copy of the email that went out to PwC employees announcing the deal.

Today’s Washington Post:

Consulting firm BearingPointappears to be near its end.

The company, which filed for bankruptcy protection last month, said late last night that it had reached an agreement with several parties — including PricewaterhouseCoopers and Deloitte — to sell “substantially all of its businesses.”

“We have concluded that a sale of the company’s business units maximizes value and provides the greatest stability for all interested parties. We are pleased that several parties have expressed interest in purchasing the majority of the company,” BearingPoint chief executive Ed Harbach said in a statement.

Deloitte is buying a “significant portion” of BearingPoint’s public services business, its largest and most successful unit, for $350 million. Pricewaterhouse will buy a “substantial portion” of the firm’s North American commercial services unit, including a segment focused on financial services, for $25 million. It was not clear what would happen with the remaining portions.
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Originally published February 4, 2009
I’m hearing that either someone buys BearingPoint soon or they’re going bankrupt. And the firm that’s now being bandied about as the recipient of this bundle of joy is PricewaterhouseCoopers LLP.      

 

Ok, you’re saying, that’s just the latest in a long line of suitors scared witless by the behemoth nature of BearingPoint’s “issues.” Almost everyone who is anyone has been mentioned – IBM, Wipro, Cap Gemini – but once they look under the hood they run 100 miles per hour in the other direction.
That’s why PwC is such a neato possibility. If anyone knows where the bodies are buried in BearingPoint, it’s PwC.
If you’ve been reading this blog a while, you know I have very specific feelings about both PwC and BearingPoint. I worked for both and, as such, can say they both hold a very special place in my heart. KPMG Consulting and BearingPoint, its successor, were places where I met wonderful people, worked for even better ones, and had the pleasure of working in Latin America during two different and very distinct tours of duty. My Latin American work was an experience that changed my life forever.
PwC, on the other hand, was where I met more fatheaded, arrogant, smug, big egos than in all the 21 years of working before that. And I worked at JP Morgan! I spent a lot of time working in New York and New Jersey, both fun and enlightening. I topped off my knowledge of how the Big 4 firms work by doing internal audits of PwC itself, from the inside. That experience convinced me there’s a book and, indirectly a unique blog, in that knowledge.
So it’s with great regret for my friends and former colleagues that continue to toil at BearingPoint hoping for stock options that may someday be worth something (mine never were,) that I have to say:
If PwC buys BearingPoint it will be the biggest boneheaded move they’ve ever made and the biggest mistake regulators could ever let them make.

“…The Company also announced that in early October it retained AlixPartners, an internationally known business and financial advisory firm, to assist in developing its 2009 plan, participate in its upcoming negotiations to restructure its indebtedness and lead a number of key cash management initiatives…             

Update on Strategic Alternatives

As previously reported, BearingPoint retained financial advisors to explore ways to improve its capital structure and liquidity in light of its evolving cash position. These alternatives initially included a merger or sale of the Company as a whole, a sale of all or substantially all of the assets of the Company or the sale by the Company of any of its six principal business units….Because the Company has not yet reached a strategic agreement regarding a merger or sale, its Board of Directors has also directed the Company’s financial advisors to begin discussions with debt holders to explore the feasibility of restructuring its debt or exchanging existing convertible debt for equity. The Company has begun to make contact with debt holders in the past week. At this time, BearingPoint can provide no information regarding the outcome of these discussions or on the timing of when they will be completed.

Forward-Looking Guidance Withdrawn

The Company announced it has withdrawn all remaining forward-looking guidance for fiscal year 2008. Given the recent dramatic changes in global financial and credit markets and the continuing pressures that these events have placed on the Company’s share price, the Company is no longer confident that it can assess the near-term implications that these developments will have.

“…we are uncomfortable trying to predict how client demand and the perceptions of entering into long-term engagements with BearingPoint will affect our financial position for the remainder of the year. We’ve factored a number of considerations into our decision, including: the speed at which our clients are making decisions based on their own outlook; the uncertainties that we face while we resolve issues such as our own noncompliance with New York Stock Exchange continuing listing standards; and our view that we increasingly believe a strategic transaction or restructuring of our indebtedness will be necessary for us to continue to fund our 2009 operations and debt obligations.”

Let’s look at the disadvantages to PwC (or any other Big 4 audit firm for that matter) of purchasing BearingPoint and the reasons why regulators such as the PCAOB and their boss, the SEC, should stop this transaction before it goes too far:

1) PwC has too much on its plate already to be be making big moves to recreate a systems integration firm. Not only is the ERP business in a downtrend as BearingPoint’s own and their fellow Big 4 firm Deloitte’s results show, PwC has already shown that their appetite for this kind of business is fickle and uneven. PwC has no patience or competence for controlling a real consulting company (not an audit firm of “separate and distinct legal entities” )with 36% of its business outside the US.

2) PwC will have to shed 1/2 to 2/3 of BearingPoint’s commercial clients because of independence issues. With a business already struggling to close and keep engagements, you’re going to tell clients, “Thanks, but no thanks, we have to resign in the middle of your SAP implementation.” And BearingPoint has to resign these engagements before PwC closes the deal. PwC can not benefit from “selling” the contract to someone else.

3) And then there’s the contracts where BearingPoint is a subcontractor and the prime contractor or a material other subcontractor is a PwC audit client. This is a distinct possibility when looking at the Federal, state and local government contracts which are almost 30% of BearingPoint’s revenue and their largest and most valuable practice.

 

 

 

 

 

 

 

 

 

 

 

 

In some cases, defense contractors (since Department of Defense make up the biggest portion of the Federal Services contracts) are the prime contractors. PwC will have to review each and every one to make sure no parties to these contracts, and there are often many, are audit clients or otherwise conflicted. And hey PCAOB! We know how good PwC is at working with lots of contracts and data…Those conflicted engagements will have to be resigned too.             

4) And then there’s the alliances. Oh, PwC folks reading, some of you know this is one of my favorite subjects. If only you had listened when you had the chance…

From BearingPoint’s 2007 annual report:             

Oracle (Auditor is EY)
Microsoft (Auditor is Deloitte)
SAP AG (Auditor is KPMG)
Hewlett-Packard (Auditor is EY)
IBM (Auditor is PwC)
Fortunately for PwC, they would likely only have to limit activities from the largest alliance relationships, per independence rquirements, with IBM. But what competitive disadvantages result?
Alliances are tricky things. BearingPoint has hundreds, if not thousands, of strategic partnerships and alliances with other firms, including large defense contractors and specialized software firms that could cause an independence conflict for PwC. Gone.
But how to extricate the firm from valid contracts and engagements that involve conflicted parties? Those contracts were not written, like some of PwC’s own newer alliance contracts hopefully were, with an “independence conflict” escape clause. Independence was the driving reason three of the Big 4 shed their consulting arms after Sarbanes-Oxley. It’s the reason BearingPoint spun off from KPMG in the first place – to be free of these restrictions. Have you forgotten that BearingPoint was originally KPMG Consulting and still rents space from KPMG in some locations! That irony, in and of itself, would be a bad consulting joke if the transaction took place.
5) Finally it’s just a bad time to get into the systems integration business with both feet, both arms and a fat head. Why invest in an acquisition that will require quite a lot of management when that type of business is seeing significant downward trends? Word is PwC is eyeing the people more than the client engagements ( huh?) so it can go after its own “independent” targets for ERP implementations, especially SAP. Yeah, that’s a great strategy now. Load up on a bunch of people that will sit on the bench. Even SAP is not sanguine.
2008 can be described as a year having two completely opposite halves, where a strong first half performance was greatly disrupted late in the third quarter by the beginning of the worst economic and financial crisis the world has witnessed in decades.”
PwC has already seen a downtrend in its audit business and increasing litigation settlement costs. Between exisitng subprime litigation, potential litigation, Madoff suits, and now Satyam, you have to wonder why they would want to get involved with a major problem child like BearingPoint.
I mean, there’s still an open SEC investigation (while they are also acting as a sub to Keane on the SEC’s Edgar/IDEA project) and PwC is still party to lawsuits against Bearing Point related to all the troubles they got themselves into earlier. Yeah, no joke, PwC was was BearingPoint’s auditor from 2003 to 2006, their prime incorrigible years!
So what are PwC’s advantages in a transaction to buy BearingPoint?
Well, if anyone knows their secrets PwC does!
-Auditor of BearingPoint from 2003 to 2006, and then they refused to stand for reelection for 2007. The audit was inherited by EY and a bright line drawn on PwC’s liabilities with the 2006 fiscal year.
-Longest tenure CFO (there’s been quite a CFO revolving door) during BearingPoint’s public years came from PwC. Judy Ethell was Tax Managing Partner in PwC’s St. Louis office. She became BearingPoint CFO in October 2006 after joining the company as Chief Accounting Officer in July 2005. (This is all while PwC was still their auditor.)
Interestingly, her husband was already a BearingPoint senior executive when Judy joined the company. He was a retired PwC Global Managing Partner in their consulting business until it was sold to IBM. Judy got caught after she became CFO handing out restricted stock units to her husband. It wasn’t reported to SEC until two years later. He quietly resigned with a very good severance package. Judy was replaced by Eileen Kamerick as CFO who stayed a sum total of three weeks.
It may seem like an advantage to BearingPoint’s employees that they can join PwC rather than experiencing a bankruptcy and surely losing their jobs. However, if experience is any teacher, they will suffer the same fate as PwC’s prior consultants experienced when they were sold to IBM. In other words, they’ll probably be out of a job anyway, but their hopes will have been raised and they will have had to endure a period under management by a firm that not only will probably denigrate and resent their KPMG pedigree but has no idea and no one capable of running a consulting business of that scale. If they didn’t already prove it with their IBM fire sale, they proved it with their audit failure with BearingPoint itself.

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14 Responses »

  1. I must say this is a great article i enjoyed reading it keep the good work :)

  2. Thanks for the background info, Francine. You do some great sleuthing :-)

  3. FYI – Headline on the Deloitte internal site today: “Deloitte announces the potential acquisition of assets of BearingPoint’s North American Public Services practice”

  4. A straight buy-out of BE never made sense, which is the issue most people had with your original posts, which clearly alluded to a 100% purchase. This latest news is little more than a liquidation saleleading into bankruptcy proceedings for the remainder of BE.

    I’d say you were about half right in your original post. D&T bought a portion of BE’s public services segment, which was a little less than 40% of their revenues, and PwC bought about 14% of BE’s revenue, represented by the commercial services segment. Together, just about 50%. But since you said it twice, I guess 50% + 50% = Francine was 100% right.

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  6. This is great news. Now maybe my Managing Durector friends will return my phone calls. I have a feeling that they have been told to talk to no-one. If only they were Toxic Assets there might be a way out…

  7. […] rush into working for just anyone, especially not the Big 4 audit firms and their “consultancies.” Plenty of time for that later when things settle […]

  8. […] recruiting SAP, Oracle, and other technical specialists as well as planning on acquiring them from BearingPoint. This is despite the fact that PwC still isn’t being honest with itself about whether […]

  9. Keane is almost in final stage of Acquisition of Bearing point. This is confirmed through an internal communication to Keane employees

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  12. […] with their reputation as the go-to firm for solving problems in tough places. Their acquisition of BearingPoint’s Federal Services practice only solidified that preeminent position as the masters of black ops magic. But notice […]

  13. […] PwC’s purchase of BearingPoint’s commercial business and heavy emphasis on reestablishing their SAP and Oracle implementation business once the non-compete with IBM expired in mid-2007 has led, according to sources, to a “winning is everything” attitude. That attitude, in turn led to mistakes like using the firm’s relationship with Satyam, an audit client, as a selling point for its outsourcing and systems intergration services. It’s also led to the scathing indictments of selling practices found in a recent United nations Inspector General’s report of PwC’s win of a multi-year, multi-million dollar SAP engagement. “…Van Essche and UN procurement officials committed “serious breaches” of UN rules to favour PwC over other bidders, the report says. […]

  14. […] contractor for the US government. Its federal services arm was bolstered considerably by the 2009 acquisition of BearingPoint’s federal services practice when that firm – a spinoff from KPMG in 1999, went bankrupt. But as the only Big Four […]

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