May 5, 2000 12:55 PM PDT

KPMG faces tough consulting crowd in IPO plans

Moving along with its plans to split from its parent company, KPMG Consulting plans to raise $1 billion in an initial public offering, according to a filing today with the Securities and Exchange Commission.

KPMG has said for the past year that it would split its consulting arm from its accounting business and file to go public.

Following its proposed market debut, KPMG LLP and its partners and principals, such as Cisco Systems, will own no more than 19.9 percent of the public company's common stock, according to the filing. Morgan Stanley Dean Witter is managing the offering and did not yet disclose the amount of shares to be sold in the IPO.

The highly-anticipated move comes amid a major strategy shift among so-called Big Five management consulting companies KPMG, Andersen Consulting, Ernst & Young, PricewaterhouseCoopers and Deloitte & Touche.

These established companies have all struggled to meet the consulting needs of the new Internet economy. They have suffered a talent exodus in recent months, as executives have moved for dot-com start-ups that can offer lucrative stock option packages.

They also face a conflict of interest concern: A privately held auditing firm should not be consulting its clients on their businesses, one of the reasons KPMG Consulting moved toward an IPO. Ernst & Young recently sold its consulting unit to professional services firm Cap Gemini. Andersen Consulting, PricewaterhouseCoopers and Deloitte & Touche are also considering their options.

An IPO could mean an opportunity for these old-line consulting firms to bolster their recruiting efforts and boost employee retention numbers. Smaller, more nimble Internet consulting firms, including Scient, Lante, Zefer and Viant, have successfully raided their behemoth counterparts by luring talent with hefty stock options and other benefits such as a chance to work in a casual environment on Internet-related projects.

Despite the IPO success streak most Internet consulting firms have enjoyed in the past year, analysts are wary of saying the same pot of gold awaits KPMG.

Analyst Tom Rodenhauser said that once KPMG nears its IPO date, it will inevitably be compared to some of the more successful, publicly traded Internet consulting firms, especially since the firm has been busy trying to revamp itself as a so-called e-consultant.

"This is not going to be a dot-com come out," said Rodenhauser, who heads ConsultingInfo.com. KPMG shouldn't be compared to the Internet consulting companies because it isn't a pure Internet player, he said. Instead, KPMG should sell itself to investors as an experienced consulting company with long-lasting capabilities.

"KPMG's story is that it's got longevity, name brand, recognition," Rodenhauser said. "They make money, they are an e-services firm that has a record of revenues, stable service offerings that have a track record to them. In that sense, it should be a good story. That story should work well where some of the (Internet IPO) hype has deflated."

But WR Hambrecht analyst Greg Gore noted that Wall Street doesn't really care about stability and profitability and still favors the nimble Internet consulting companies.

"The pure plays have a lot of credibility?I expect pure plays to continue to take market share, Gore said."

KPMG and its rivals continue to formulate new compensation programs to attract more talent as well as alter their consulting practices in an effort to capture more lucrative business e-commerce and Internet-related contracts.

Andersen Consulting recently devised a new employee compensation plan in a bid to hire and keep top-notch employees. Under the plan, Andersen will invest $200 million in e-commerce related firms on behalf of its "high-performing" employees, and the money generated by these investments will be distributed to them as options in the fund, which are fully vested after a one-year period.

KPMG, which has about 17,000 employees in 160 countries, plans to trade on the Nasdaq under ticker symbol "KCIN."

 

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