After simmering away quietly for the last year, the sovereignty stand-off between IT consultancy Andersen Consulting and Big Five accountant Arthur Andersen finally looks set to ignite. The warring factions have set an October 25 date for a closed door hearing that could see Andersen Consulting break away from its sibling – and more recently, rival – in an argument that dates back to 1996.
The hearing in New York over Andersen Consulting’s divorce petition should last around two weeks. However, a decision by Guillermo Gamba, the International Chamber of Commerce arbitrator looking after the dispute, on whether to grant the request is not expected before early 2000.
Andersen Consulting accuses Arthur Andersen of breaking the US Securities and Exchange Commission agreement filed by both companies in 1990. The covenant was supposed to protect Andersen Consulting’s business interests by limiting Arthur Andersen’s freedom to deliver IT-related consultancy services to companies with annual revenue of less than $175m. However, Arthur Andersen has now used several hundred million dollars in income sharing payments obtained from Andersen Consulting to build its own IT consultancy practice which competes directly with Andersen Consulting in areas such as Year 2000 consulting, SAP R/3 implementation and e-commerce consulting. Worse, there have even been allegations that Arthur Andersen is poaching staff and using Andersen’s Consulting name to acquire business.
Unsurprisingly then, Andersen Consulting now wants to take control of its own destiny rather than helping its less profitable forbear take away business. It wants $650m in transfer payments and $150m in compensation from Arthur Andersen, although $250m of the former is currently frozen in escrow. The difficulty for Andersen Consulting is that Arthur Andersen has more partners in Andersen Worldwide (about 1,700 compared to Andersen Consulting’s 1,100, according to 1998 figures) making it virtually impossible for Andersen Consulting to gain its autonomy without recourse to legal action.
Escape for Andersen Consulting may not come cheap, however. A memorandum from 1989 requires that any departing partners pay 150% of current revenues (approximately $12.5bn), abandon the Andersen name and hand over all technology previously developed by the partnership. However, Arthur Andersen has made no such demands to date. Whatever the decision, the saga is unlikely to end there. Complex cross ownership issues remain that might require outside valuations and even a capital infusion. A flotation of Andersen Consulting, and perhaps a merger of Arthur Andersen with another auditing/consulting firm, are among the possibilities.
Arthur Andersen set up Andersen Consulting in 1989 to take advantage of the growing demand for computer consultancy and systems integration. However, in the ten years since then Andersen Consulting has outgrown and been more profitable than Arthur Andersen. Andersen Consulting is now the third largest IT services company (after IBM Global Services and EDS) with 1998 revenue of $8.3bn compared with Arthur Andersen’s $6.1bn in its last financial year.
Lawyers Simpson, Thatcher & Bartlett will represent Andersen Consulting, with Weil, Gotschal & Manges looking after Arthur Andersen. Fried, Frank, Harris, Shriver & Jacobson will stand for parent company Andersen Worldwide.
