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November 23, 1999

Cisco $1bn Investment in KPMG to Spur Consultancy Spin-Offs?

By CBR Staff Writer

By Tony Cripps

Cisco Systems Inc is confident that its intended $1bn investment in the consulting wing of Big Five accountancy KPMG will go ahead. Cisco believes the indications are that the US Securities and Exchange Commission is set to withdraw its objections to outside companies making equity investments in KPMG.

However, while Cisco appears to believe the decision is a formality, KPMG is keeping quiet pending a formal decision which it expects around the middle of next year. The proposal, which was announced in August, was referred to the SEC’s Independence Standards Board on the grounds that, as a potential auditor to Cisco or its partners the investment could lead to a conflict of interests.

The SEC’s decision could be crucial in deciding the future of the Big Five’s consulting arms. A positive decision in favor of Cisco would open the door for the remaining Big Five to pursue similar strategies. Indeed, such moves look increasingly likely.

Rumors last week that PricewaterhouseCoopers LLC will float its consulting wing were given substance yesterday when the Scott Hartz, head of PwC’s consulting division backed suggestions that the unit is seeking to increase its autonomy.

Hartz told Cambridge, Massachusetts-based research company Forrester Research Inc that PwC could yet grant its consulting group limited independence through strengthening of existing Chinese walls. However, Forrester is convinced that Hartz’s alternative of an IPO is the only viable option for improving the unit’s competitiveness.

Like KPMG, PwC needs the freedom to develop closer partnerships and investment opportunities if it is to successfully develop the e-business capabilities that are seen as vital to their consultancies’ future viability. Forrester expects new breed consultancies such as USWeb/CKS and Viant to be high on the Big Five’s shopping list once the investment arrives.

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Forrester expects the remaining accounting giants, Ernst & Young and Deloitte & Touche, to follow suit in due course, although they have yet to indicate their intentions.

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