The Friday after Thanksgiving should be a quiet news day. But not in this crisis environment. In addition to heartbreaking news from Mumbai, two more stories about KPMG were caught in my newsnet in the last twenty-four hours.
“…The KPMG team spent four months running the numbers on what BCE would look like after being taken over by the Ontario Teachers’ Pension Plan, and concluded the company didn’t pass solvency tests after it shouldered $32-billion of new debt. Sources close to KPMG said the BCE decision, while weighty, was a by-the-book call for Ms. Glass, a former accounting professor at McMaster University who joined the firm in 1989 and quickly rose up the ranks, in part owing to her skill in assessing the value of takeover targets.
And in an earlier article in the Globe and Mail:
“I think this is one of the most controversial calls in auditing history in Canada,” said Anthony Scilipoti, executive vice-president of Veritas Investment Research Corp., an independent research firm with expertise in accounting issues.
Early morning news of KPMG’s decision sent BCE’s stock into a deep swoon, wiping out $10.6-billion in market value as the company’s stock fell 34 per cent to close at $25.25 after more than 47 million shares were traded.
While investors were caught off guard by the auditor’s decision, it appears that BCE’s executives knew FOR WEEKS that KPMG had concerns about BCE’s solvency.
Sources said KPMG’s auditors had been meeting with BCE and Teachers for weeks to gather data to test the company’s solvency, or ability to pay all of its debts as they came due…
Ironically, BCE’s board inserted the solvency requirement into the definitive agreement, one source familiar with the situation said. BCE, however, said both sides agreed the clause should be written into the agreement.
Once it becomes part of the merger agreement, a court would likely view it as strongly as any other requirement in the deal — such as regulatory or shareholder approval — which would make it difficult for BCE to argue that the provision was subject to interpretation …
“There’s been no angst or rancour in the relationship [with KPMG]; it’s all been very professional,” said one source close to BCE who declined to be identified…”
Now, that solvency opinion could be the undoing of the largest leveraged buyout in history.
Since KPMG’s view still remains preliminary, BCE could try to satisfy the requirements before the Dec. 11 closing date, launch a challenge against KPMG, or convince the buyers to proceed with the deal regardless. All of those options are fraught with problems, lawyers said.
“Even in the face of litigation, KPMG will just say ‘I’m the neutral messenger,'” Columbia University Law School Professor John Coffee.
BCE could try to find another accounting firm to give an independent solvency agreement or launch a legal challenge that KPMG’s opinion was flawed, legal experts said.
“BCE will likely bring in another consulting accounting firm to evaluate KPMG’s assumptions and show they made XYZ errors or incorrect assumptions,” said Donald Zakarin, head of litigation at Pryor Cashman.
“There will likely be challenges to the assumptions that KPMG used and potentially challenges to KPMG to re-evaluate its assumptions,” Zakarin said. “Accounting isn’t cut and dry. There’s more than mathematical rigor involved.”
The condition to have a solvency opinion by a third party is rare in large deals, said Joel Greenberg, a partner at law firm Kaye Scholer, who specializes in mergers and acquisitions.