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.”
So what are PwC’s advantages in a transaction to buy BearingPoint?
Well, if anyone knows their secrets PwC does!
-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.)
Fascinating news/speculation, Fran. A few months ago it appeared that PwC Advisory was making a HUGE bet in the ERP (SAP/ORACLE) implementation market. I had thought that the current economic situation would cause them to cut back on that play … but your scenario could fit the situation. Let’s hypothesize …
Assume you are one of the annointed leaders of PwC Advisory and have convinced/cajoled/demanded that the firm move in the direction of ERP implementation. It will be the replacement for all the lost SOX money, you tell your partners. The firm invests millions in experienced hires, training, tools, marketing, etc. You reap the individual rewards associated with heading a key strategic initiative, both in terms of power/prestige and additional units. But it’s an irrevocable bet-the-career move. As long as things go well, you’re golden; but if the bet doesn’t pay off, you’re history. And times are tough …
So what do you do? Do you admit defeat, write-off the investment, and take an early retirement? Hell NO! You double-down. Buy BearingPoint and multiply the investment tenfold, incidentally increasing the risk tenfold as well. But it buys you time, time in which to enjoy the extra units while you “manage” the integration–which will be another huge project that will take years and give you even more prestige (and units). The additional partnership investment could buy you enough time to make it to age 60 for your “planned” retirement.
What happens to the firm after your departure will be up to those other partners to deal with. And it won’t be your poor strategy and/or decision-making that led to the failed merger; you (or your replacement) can blame the economy, or a culture clash, or poor project execution. There will be innumerable opportunities to point the finger elsewhere if, as Fran speculates, the combined firm fizzles and earnings disappoint.
So the personal upside is considerable–at a minimum you keep your status (and units) with a potential for more, as the architect of a huge merger. The downside is no deeper than it currently is, at least for you. The deal is a go!
Far-fetched? Possibly. But it could provide a rationale for an otherwise … shall we say, imprudent … business decision. It would be consistent with the apparent decision-making process of an average (perhaps by this point desperate) partner as I witnessed it. It would also be consistent with the average partner’s inability to differentiate the desired situation from reality. The strategic direction is NEVER wrong; it must have been poor execution. Just ask Juan Pujadas and Carter Pate.
Me, cynical? Nope. Just experienced.
— Tenacious T.
Francine:
Is PWC crazy? That it would consider buying BearingPoint indicates somebody there has been eating too many magic mushrooms.
McGladrey heading down the creek without a paddle…
WSJ…
Tough times for the Minnesota accounting firm of McGladrey & Pullen: The firm has now been sued in relation to the both the Bernie Madoff and Tom Petters Ponzi schemes. Here’s a report from the StarTrib.
Last week, an investment fund that placed $280 million with Madoff sued in state court in Connecticut, saying its auditors — Goldstein Golub Kessler, in 2006, and McGladrey & Pullen, in 2007 — failed to detect the fraud. And, in October, the Ellerbrock Family Trust filed a similar suit in a Minnesota federal court saying that McGladrey & Pullen failed to conduct thorough audits or take other actions that would have uncovered alleged fraud by the Petters companies. (For LB background on Petters, click here.)
McGladrey’s general counsel did not respond to the StarTrib’s request for comment.
The problem is that BP must in my view go through bankruptcy first. There are too many liabilities at issue with BP, and bankruptucy washes most of them away or at least makes them manageable.
And if PwC is one of the suitors (let’s say, for the public sector practice), I just don’t get it. They have all of the independence problems Francine aptly relates (which dilutes the value of PwC’s investment) – just think of how crucial it is to get on one of the big ticket IDIQ contracts in the federal market place and how many subcontractors are on prime contract teams – it makes moving up into or growing in the federal information technology really challenging. And just how will customers view a bankrupt consulting firm? Even though this economy is dire, it it doesn’t make sense to think that many of the contracts won’t survive intact. And in that case, the people can be picked up by any number of other employers. Nothing about this makes sense.
Anyone still at BearingPoint is delusional, not very talented and can’t get another job. For the most part, anyone at BearingPoint who was any good has already left.
Tenacious T – you’ve (once again) summed it up perfectly!
Great post, Francine. Right on, TT. Sad, but probably true, hypothesis.
Here in Norway the country manager and all the partners left Bearingpoint in the spring of 2008, bringing about 60% of the employees with them. Most of them joined Ernst & Young, who "incidentally" were located in the lower floors of the same office building 🙂
Francine – you going to comment on how Howie M. noted that Fairfield was “auditor shopping” and just so happened to use PwC twice but different member firms in two years?
PwC between this, Saytam, buying BP…wow, misery loves company I suppose.
Before anyone gets too fired up over this, keep in mind that Francine’s “source” is another person’s blog…
I van confirm that PwC is having talks with Bearingpoint. This is more than just a roumour.
Does anyone know what’s been happening to BP in Australia? Seems many moved to Deloitte last year and there are only 6 MD’s left.
In general, I would agree that BearingPoint represents a huge risk to any suitor given the overwhelming debt and current opportunity for refinancing (slim to none). However, let me make two points that do not seem to be given proper consideration. If an organization the size of PwC acquired BearingPoint, they would be able to service the debt internally without the requirement to refinance the debt. Secondly, with a credit profile such as PwC, they actually could refinance the debt. The underlying contracts (beyond just SI work) hold considerable value and the customer relationships remain solid. The idea that PwC would have to "give up" 1/2 to 2/3 of the contracts due to a conflict of interest is simply preposterous. First off, there would be, on average 1/4 of BearingPoint clients that would be current (external) audit clients of PwC. For those contracts, there would be a decision made as to the duration required to complete the SOW's. Contracts that would be completed prior to the closing of the transaction (say ninety days) would be completed by BearingPoint with any warranty obligation booked as an assumed liability. Any contracts that extend more than ninety days out would be identified and evaluated for sale to third parties (Accenture, Navigant, etc.). While this does not give you the same return as completing the contracts internally, there would be a theoretical return on this business, such return would revert to BearingPoint (pre-acquisition). This happens all the time. Anyone that was with Price Waterhouse when they merged with Coopers & Lybrand (or AY when they merged with Ernst & Whinney) understands the drill. Therefore, the anticipated "shrinking" of the business due to COI as offered by the author is greatly exaggerated. One other point to make. The Public Services (mislabeled Federal Services) Division has some large, very lucrative contracts with governments outside the U.S. It would be irresponsible to overlook or undervalue these contracts. Suffice it to say – PwC and many other consulting firms have been drooling over these contracts for years. As for PwC waiting for bankruptcy filing/clearance, that would not happen. The majority of clients of BearingPoint would exercise their standard right to terminate the contract in the event of bankruptcy and the firm would have little residual value. At that point, there would most likely be an MBO by a group of key MD's to service the few remaining contracts of value.
Unlike Anon above, I do not think the COI problems presented by an acquisition are “greatly exaggerated”. Much of BearingPoint’s PS work is comprised of longer-term contracts, ones that would be unlikely to be wrapped up within 90 days. And Federal Services is (or was) a group within Public Services when last I worked at BE. I’m also not sure if there would be any FAR implications with shopping the contracts around to competitors of BE.
Wow…I can’t believe I just discovered your blog. This is very insightful to say the least.
They have made it official….just sent this out to everyone about 15 minutes ago.
Economic downturns often present attractive opportunities to strengthen a business and to sprint ahead of the competition. In fact, we’re in front of one right now….one that could — if it comes to fruition — help us advance our PwC strategy and position us to emerge from this downturn stronger than we went in.
Yesterday, we reached an agreement in principle and signed a non-binding letter of intent with BearingPoint and its secured lenders to acquire selected U.S. contracts, assets and key employees of their Financial Services and Commercial Services practices. We expect to receive contracts with a $200 million revenue stream. At the same time, PwC Japan has reached an agreement in principle to acquire BearingPoint’s entire Japanese consulting practice, with a $175 million revenue stream.
This transaction, if it closes successfully, represents one more step among many that collectively advance our strategic agenda — namely our commitment to help clients create and sustain lasting change. In short, we expect to strengthen our credentials to help our clients successfully undertake large-scale business transformation projects by expanding our strength in areas such as strategy, planning, operations and technology — particularly with respect to SAP and Oracle expertise. While we are not getting back into the large-scale IT implementation business, those IT credentials are essential, in some cases, for PwC to advise our clients on their successful undertaking of large-scale business transformation projects. In addition to gaining new talent, top-tier clients and a broad new portfolio of contracts, we are also acquiring certain intellectual property, including proven methodologies, templates and thought leadership that will help our overall Advisory business.
We emphasize that this is just a bid at this point — not a completed transaction. And there’s no guarantee that our bid will be awarded. In fact, in many respects, the process is just beginning.
Highlights of the process ahead
The transaction is subject to execution of a definitive asset purchase agreement and Bankruptcy Court approval. It is anticipated that, consistent with normal bankruptcy procedures and prior to approval of the definitive agreement by the Bankruptcy Court, the Court will require the initiation of a process to market the business to third parties. BearingPoint will support our bid during this process based on our agreement in principle. During this phase, however, other bids may emerge. The final decision will be made by the Court based on the highest and best offer. As you can see, there are a number of procedural thresholds needed to close this transaction and this process is expected to take several weeks.
Why this makes sense for all of us
So, what exactly are we seeking to acquire? Why are we are pursuing this transaction in this economic climate? What, precisely, would the impact be on your work, your job and your opportunities here at PwC? Again, it’s still early in the process, but since it’s natural to feel some anxiety about any type of change when the economy is in difficult straits, let’s speak to these questions directly.
Advancing Advisory’s ability to help clients create and sustain change. Here’s what we’re seeking to acquire: key contracts and new clients — primarily in energy, utilities, insurance, pharmaceuticals, and life sciences — along with key people and certain intellectual property critical to meet these new contractual obligations. Helping clients “anticipate, create and manage change” is the mission that drives our entire Advisory consulting practice. If we close this transaction, we gain valuable assets and an exceptional range of expertise central to this mission.
Emerging from the downturn stronger than we went in requires savvy and opportunistic investments. As we have said before, we are in difficult times and are feeling the impact of the economic headwinds on our business. So it is critical that we continue to be judicious with costs, cautious about our compensation policies, and focused on delivering the PwC Experience to our clients. It is also critical to continue investing in our people, looking ahead and making the right long-term decisions for the Firm. This transaction allows us to address each one of these priorities. How? Because, informed by our due diligence findings, the bid we are presenting is only for the assets that are directly aligned with our strategy, valued at what we believe is a fair economic price. In other words, if we close this transaction, it will be on our own terms — strategic, financial and economic.
This opportunity is about acquiring complementary new talents. As with prior Advisory acquisitions in 2008 (Entology, NDS), this transaction is overwhelmingly about acquiring new talent, capabilities, contracts and client relationships that specifically advance and enhance our Advisory and Firm strategy. We view the key people and talents we may be acquiring as strategically complementary to the goals we are all working to achieve. And with greater bench strength in key areas — such as strategy, planning, operations and technology — we can strengthen the PwC Experience for our clients and expand opportunities for ourselves, not just now but later, when markets come surging back.
Undoubtedly, you will have many additional questions. We ask that you be patient with the process we must go through to bring this to what we hope will be a successful conclusion. As we mentioned above, since the Bankruptcy Court must go through the process of marketing the business to third parties, you may see our competitors or other organizations bidding for the same assets. While we await the next steps, we hope that you are enthusiastic about what this transaction will bring to our clients and our Firm alike. We will continue to provide you with updates as substantive events unfold.
Seems like 2 of the big 4 are acquiring the portions of the business.
Consulting firm BearingPoint Inc (BGPTQ.OB) said it agreed to sell a large portion of its public services unit to Deloitte [DLTE.UL] for $350 million.
The company, which filed for Chapter 11 bankruptcy last month, said it also signed a non-binding letter of intent to sell a substantial part of its North American Commercial Services business to PricewaterhouseCoopers [PWC.UL] for $25 million.
PwC’s Japanese unit is also in negotiations to buy BearingPoint’s consulting business in Japan.
Separately, BearingPoint is in the late stage of discussions with local companies interested in acquiring its European and Latin American practices, the company said in a statement on Monday.
AlixPartners and Greenhill & Co are acting as financial advisers to McLean, Virginia-based BearingPoint. (Reporting by Elinor Comlay, Editing by Ian Geoghegan)
The buzz is that Deloitte is Purchasing Public Service division of Bearing Point for $350m & PWC is Purchasing
Japan Financial Service division of Bearing Point for $25m & already
there are proposals/Negotiations to Sell of Europe, Latin America
divisions as reported in this website
http://www.ad-hoc-news.de/bearingpoint-reaches-agreement-to-sell-key-business-unit–/de/Unternehmensnachrichten/20124824
http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20090323006350&newsLang=en
http://www.google.com/finance?q=OTC:BGPTQ – Bearing point Stock price will start soaring upside based on the announcement I believe.
Any idea what part of CS will be picked by PWC ?