LONDON – Andersen, indicted in the United States over its auditing of collapsed energy trader Enron (ENR), revealed on Monday it was in talks with rival KPMG to merge Andersen's non-U.S. operations. But defections and regulation might scupper the beleaguered accounting firm's attempt to salvage non-U.S. operations via a merger.
The Chicago-based firm, the smallest of the big five global accounting groups, faces billion dollar lawsuits and client defections in the wake of the Enron scandal.
The proposed deal aims to rescue Andersen's businesses outside the U.S. but the firm could struggle to keep partners on board and get regulators on side, accounting industry experts said on Tuesday.
A merger of Andersen and KPMG would create a force with some 140,000 staff and $12.2 billion in revenues outside the United States.
Andersen has already begun negotiations in various parts of the world to combine the two firms' operations in Europe, Africa, Middle East, Canada, Asia and Latin America.
But some partnerships -- such as in Spain -- have already been trying to wriggle free.
John Ormerod, a managing partner of the UK business, said the proposal was backed by the Andersen Worldwide board and had the support of Andersen people around the world.
``Other options remain and we have considered them, but this is the best option,'' he told a news conference.
But accounting industry experts raised questions over whether Enron-related liabilities could cross the Atlantic to affect Andersen's partnerships overseas.
UK partners have unlimited liability, which means they can be held personally liable for claims made against the company.
``There are questions over the extent to which anything can be firewalled against stuff coming out of the United States,'' said an executive at one of the major accounting firms.
Ormerod said the UK operation was legally quite separate and KPMG had obviously felt confident enough to pursue the talks.
Andersen UK management portrayed the deal as the best option for stabilising the business. But some partners might still prefer to go it alone.
In Spain, Andersen affiliate Garrigues & Andersen is trying to break off from the worldwide group.
One accoutancy expert said partners with equity stakes in the business could hang on but those on salaries could walk away.
``Some partnerships could simply break up in certain countries and others move to one of the big four firms,'' he said. ``I would be surprised if it goes en bloc to KPMG.''
For KPMG the attraction is to pick up people and practices in one go and climb up the rankings.
``It would be quite a leap for KPMG,'' said another accoutancy expert. ``They would be in sniffing distance of industry leader PricewaterhouseCoopers.''
But competition will be an issue. Regulators have already got the merger on their radar screens as it would reduce the number of big global accounting firms from five to four.
In the UK, John Tiner, managing director at the Financial Services Authority, has said the merger would be damaging to competition.
European Union competition watchdogs could also get involved. A European Commission spokeswoman said: ``If there is a deal and if it matches our thresholds and the companies file a proposed transaction then we will consider it.''
The next steps would depend entirely on the structure of the merger. If Andersen is broken into pieces and they are acquired separately in individual countries, the deals may be small enough to be considered by domestic competition authorities rather than the European Commission.
If Andersen is sold as a Europe-wide entity then it might fall to the Commission to look at it.
The mechanics of the merger are still being worked out and Andersen's UK managing partners said it was not possible to say at this point whether any money would change hands.
Chris Rowlands, UK managing partner, said it would be structured as a combination of people, revenues and profit sharing.
The fate of Andersen UK's consulting business is yet to be decided. KPMG has divested its consulting arm and it is unlikely Andersen's would remain within the merged group.
``The merged business cannot have a consulting arm,'' said David Sproul, UK managing partner.