Some of the fog surrounding Deloitte Touche Tohmatsu's intention to shed its Deloitte Consulting IT and management consulting unit was lifted when Deloitte Consulting announced Thursday afternoon that it will become a privately held independent company.
Four months ago, Big Five accounting firm Deloitte Touche Tohmatsu reluctantly announced in the wake of the Enron Corp. scandal that it would separate from Deloitte Consulting to avoid concerns over conflict of interest and auditor independence, but it didn't say how the separation would be carried out.
On Thursday, Deloitte Consulting announced it will become an independent, privately held company, and that other options such as a merger, a sale to another firm, an initial public offering (IPO) and "an arms-length relationship" with Deloitte Touche Tohmatsu, based in Switzerland, have been ruled out.
Going this route makes sense for Deloitte Consulting because it would allow the unit to keep its group together and employees happy, which in turn would result in customer satisfaction, said Michele Cantara, an IT services principal analyst at Gartner Inc.'s Dataquest Inc.
And being a private company in theory could allow Deloitte Consutling to focus on long-term goals without the pressure that public companies often face to deliver on short-term results, she said. "Not everybody has to go public."
Plus, the transition to an independent, privately held company probably will be less bumpy and less disruptive to Deloitte Consulting's clients than an IPO, a merger or an acquisition, Cantara said.
Although many details still need to be worked out, Deloitte Consulting's partners would own the majority of the company, and Deloitte Touche Tohmatsu would retain a minority stake, Deloitte Consulting's spokesman John L'Abate said Friday.
To accomplish the separation's main goal of eliminating conflict of interest and auditor independence concerns, however, Deloitte Consulting and Deloitte Touche Tohmatsu are going to have to be very open and specific about their ongoing relationship, especially if the latter is going to have a stake in the new company, Dataquest's Cantara said.
Although it makes sense for Deloitte Touche Tohmatsu to initially retain a stake in Deloitte Consulting, since it will be transferring infrastructure to the new company, Deloitte Touche Tohmatsu should progressively dilute that stake in the three to five years following the separation, she said.
"If Deloitte Touche Tohmatsu retains a level of ownership in Deloitte Consulting, it could be an issue for some people," Cantara said.
"They can't operate as a private subsidiary of Deloitte Touche Tohmatsu because that wouldn't achieve the goal of the separation, but I'm sure it's not their intention" to operate as a private subsidiary, she said.
Deloitte Consulting expects the separation to be completed by the end of the year. When ready, the separation plan will be subject to approvals from a variety of sources, including partners, directors and regulatory agencies. Deloitte Consulting currently has about 15,000 employees in 33 countries.
As part of the separation, Deloitte Consulting plans to change its name and brand, to focus more on client satisfaction and to explore new types of relationships with clients such as joint ventures and profit sharing.
Deloitte Touche Tohmatsu's decision to remove its IT and management consulting unit from its fold is a response to concerns that accounting firms can compromise their auditing work if they sell consulting services to clients they also audit.
This has been an issue for years, but it has been on the spotlight since the collapse of Enron Corp., whose accounting practices are the center of the scandal. Enron's auditor, Arthur Andersen LLP, also provided non-audit consulting work to Enron. Arthur Andersen finds itself now trying to survive its role in the Enron debacle.
All the other Big Five accounting firms have taken or are taking steps to put distance between themselves and their consulting practices. Andersen Worldwide SC, the international firm to which Arthur Andersen LLP belongs, is in the process of getting rid of its various consulting units, including its IT and management consulting unit. PricewaterhouseCoopers has announced plans to spin off via an IPO its management and IT consulting unit PwC Consulting, making it an independent company. KMPG LLP spun off via an IPO last year its IT consulting unit, now an independent company called KPMG Consulting Inc. Finally, Ernst & Young International sold off in 2000 its IT and management consulting unit to Cap Gemini.