KPMG Consulting Inc. has decided to hire en masse the staff of Arthur Andersen LLP’s business and IT consulting unit, instead of acquiring the unit itself, apparently in order to shield itself from legal liabilities.
KPMG Consulting, a provider of IT services, announced in May that it had signed a letter of intent to acquire most of Andersen Worldwide SC’s business consulting units, which provide IT and business management services.
The biggest of those units is the one belonging to Arthur Andersen LLP, which is the U.S. firm of Andersen Worldwide. But Arthur Andersen LLP faces mounting legal troubles, including a conviction for obstruction of justice handed down this month for destroying Enron Corp. documents to disrupt an investigation by the U.S. Securities and Exchange Commission (SEC).
KPMG Consulting Chief Executive Officer Rand Blazer had said back in May that his company’s acquisition of the Arthur Andersen LLP business consulting unit was dependent on Arthur Andersen LLP resolving “in the most prudent and most effective way” its liability issues.
Immediately after the conviction, KPMG Consulting declined to comment on whether it would continue with its plans to acquire Arthur Andersen LLP’s business consulting unit.
But on Wednesday, KPMG Consulting announced it had reached a definitive agreement to hire about 1,400 employees and 140 partners from Arthur Andersen LLP’s business consulting unit, and not the unit itself. It didn’t provide an explanation as to why it was structuring the deal in this manner.
“It’s a mass hire,” a KPMG Consulting spokesman confirmed on Friday, declining to say why the company chose to go this route.
J.P. Morgan Securities Inc. analysts wrote in a note after the announcement that KPMG Consulting did this to avoid acquiring liabilities.
“The primary rationale for structuring the transaction as a group hire is to effectively shield KPMG (Consulting) from any of Andersen’s legal liabilities,” the note reads. “As such, KPMG (Consulting) is not buying any Andersen assets or liabilities.”
Since KPMG Consulting is hiring the employees but not buying the unit, Arthur Andersen LLP partners are released from their noncompete agreements, clients are released from their contracts and KPMG Consulting can sign up these clients, according to the note. J.P. Morgan Securities and/or its affiliates have acted as lead or co-manager in an offering of securities for KPMG Consulting within the last three years, according to the company.
The definitive agreement, expected to become final next month, calls for KPMG Consulting to pay US$63 million for the employees, the company said in a statement. The new hires could pump about $65 million into the company’s net revenue in the quarter closing in September, the company said.
This mass hire deviates from KPMG Consulting’s strategy in acquiring 22 other Andersen Worldwide business consulting units elsewhere in the world, the company spokesman said. In those cases, KPMG Consulting has acquired or plans to acquire the consulting units, which would involve not only employees but other assets as well, he said.
For example, KPMG Consulting has already signed definitive agreements or closed the transactions for all or parts of Andersen Worldwide’s business consulting units in Japan, Norway, Finland, Switzerland, Sweden, Australia, Hong Kong and China.