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Ey Breakup is a Number-cruncher’s Nightmare
NEW YORK, Sept 9 (Reuters Breakingviews) – It’s simple to argue a corporation should be broken up, but it’s much more difficult to make it happen. That is especially true of the proposal to dissolve Ernst & Young, whose partners will vote in the coming months on separating the firm’s consulting unit from its audit arm. Strategically, it makes sense. It’s a number nightmare, that cruncher’s both logically and mathematically.
EY is breaking itself apart not only because authorities in the UK and elsewhere want it to, but also because it makes sense. Accounting firms frequently cannot audit corporations who are also consulting customers; therefore, having two different entities, most likely with the consultancy as a public company, would allow EY to extract more milk from the cow. Chief Executive Carmine Di Sibio estimates that this might generate an additional $10 billion in sales on top of the group’s current $45 billion in revenue.
The devil, however, is in the details. In contrast to a publicly traded corporation, where shareholders may vote just once to approve a separation, EY must have local elections in over 75 countries. Some require only a simple majority, while others require two-thirds support. Some locales allow each partner one vote, while others divide authority based on how much capital a person has. In certain areas, partners with specific accounting credentials are given a separate vote.
Valuation is no less difficult. If the firm divides, audit partners would essentially swap their portion of the consultancy for the share of the audit business held by consultants. To balance things out, a large sum of money would be paid to audit partners. However, the valuation will be based on assumptions. Pricing a consultant isn’t difficult: competitor Accenture (ACN.F) trades at little less than three times this year’s expected revenue, according to Refinitiv. However, none of the major accounting firms in the United States are publicly listed.
In exchange for equity, EY sold its original consultancy in 2000 to IT business Capgemini (CAPP.PA). Partners then watched in misery as the buyer’s stock dropped 95% in two years, while EY rebuilt its consultancy when the non-compete agreement expired. There is no acquirer’s stock to worry about this time, but the value is still important. Because the firm’s owners are also its employees, a contract in which one party outperforms the other is likely to result in a frustrated staff. Auditors and consultants are taught to be skeptical of transactions and values; selling them on this strategy will put EY to the test.
Ernst & Young said on September 8 that it will poll its partners on whether it should separate its audit and consultancy operations. The poll, which will be conducted nation by country, will begin later in 2022, with the corporation anticipating a decision in early 2023. The split would require partners in each firm maintaining holdings in their respective parts, as well as cash given to audit partners to account for the differences in the two units’ worth.
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