CurrentAffairs
KPMG and AndersenAre Discussing a Deal
By Suzanne Kapnerand Jonathan D. Glater
The New York Times
KPMG and Arthur Andersen said yesterdaythat they were in talks on a merger of their operations outsidethe United States, in the latest effort to salvage parts of Andersenas it prepares to challenge a criminal charge.
Andersen is expected to tell a federal judgetomorrow that it wants to waive all pretrial motions so that proceedingscan start as soon as possible, according to lawyers for the firm.If successful, that could mean a trial on a charge of obstructionof justice for destroying thousands of Enron documents could bescheduled to begin within a matter of weeks.
The parallel actions suggest that Andersenis girding to be a leaner firm focused on winning an acquittalquickly enough to retain as many American clients as possible.The talks with KPMG appear to be an attempt to pre- empt the foreignAndersen partnerships, which were beginning to negotiate theirown deals anyway, but it is still a gamble, other lawyers said.If forced to seek bankruptcy protection as a result of additionalclient defections and a criminal conviction - an option that thefirm has vehemently rejected so far - Andersen would not haveits valuable overseas assets with which to negotiate.
What is clear is that if Andersen survivesthe coming battle with the Justice Department, the firm that emergeswill be very different from the powerful, worldwide partnershipthat several months ago seemed unsinkable. Without its overseasbranches, it will be more difficult for Andersen to serve prizedmultinational clients, whose businesses stretch across nationalborders, accountants said, and the firm will also be less attractiveto a potential acquirer.
And American clients continue to defect:yesterday, the pharmaceutical company Wyeth, formerly AmericanHome Products, announced that it would drop Andersen as it auditorand instead retain PricewaterhouseCoopers.
The Securities and Exchange Commission tooka step late yesterday that might reassure Andersen's remainingclients, saying that it would accept financial statements auditedby the accounting firm as long as Andersen provided assurancesthat it was complying with generally accepted auditing standards.
Companies may also submit unaudited financialstatements - on time - if they then file audited statements within60 days.
Nonetheless, negotiators for both Andersenand KPMG have had to act quickly to prevent the global networkfrom splintering into dozens of pieces. On Friday, a day afteran indictment was unsealed charging Andersen with obstructionof justice for destroying thousands of Enron documents, partnershipsin Spain and Chile said they had begun to sever ties with theworldwide practice, and those in Italy, Portugal and Switzerlandsaid they were considering doing the same.
The intent of the negotiations with KPMGis to keep as much of Andersen's global network intact as possible,while insulating the foreign partnerships from Enron-related fallout.Andersen's mounting legal troubles effectively negated the possibilityof a merger that would have included the United States practice,people involved in the talks said.
"We are continuing to work togetherto consider possible ways in which to combine our operations,"said Mike Rake, chairman of KPMG for Europe, the Middle East andAfrica.
Any deal between Andersen and KPMG wouldrequire the approval of local partners in Europe, Africa, theMiddle East, Canada, Asia and Latin America, and would requirethe blessing of antitrust regulators in those regions.
Such a combination would create the world'ssecond-largest accounting firm behind PricewaterhouseCoopers,with annual revenue of $16.5 billion. Nearly half of Andersen's$9.3 billion in annual revenue in 2001 came from the United States;the rest is split among the various regions with Western Europeaccounting for the biggest chunk, at $2.9 billion.
But the prospect of merging Andersen's internationaloperations with another firm and thereby separating them fromthe American practice raises murky legal issues, lawyers said.Andersen partners outside the United States have maintained thattheir firms are separate legal entities and as such would notbe liable for potential claims against Arthur Andersen L.L.P.,the Chicago- based practice.
Plaintiffs suing Enron and Andersen saythat they will attack that argument. Steve W. Berman of HagensBerman said he planned to add Andersen Worldwide, a Geneva- basedcompany that encompasses the entire partnership, including theforeign affiliates, as a defendant in a class-action suit. Mr.Berman is representing Enron employees who lost money in their401(k) accounts when the company collapsed.
Legal experts said it was unclear whether the courts would treatAndersen as a loose band of affiliates, or as a firm that in essenceacts as a global entity.
Andersen Worldwide is a "sociétécooperative," a structure unique to Switzerland that allowsit to oversee member firms loosely. Each national firm, for instance,typically has an agreement with the Swiss parent that allows itto participate in the global network, including sharing revenue,marketing and technology.
And some, but not all, local partners alsoshare profits on a global scale - which means it is not clearwhether the overseas partnerships could be liable for debts ofAndersen in the United States.
"They hold themselves out as part ofan international organization," said Matthew J. Barrett,associate professor at the Notre Dame Law School. "The questionis whether or not the court will prevent the partners from denyingthe existence of a global partnership."
Lynn LoPucki, a law professor at the Universityof California at Los Angeles, said that at most a court wouldprobably allow Andersen creditors to intercept payments from theworldwide partnership, and would not permit them to go after AndersenWorldwide directly. Andersen "is one partner in a partnership,"he said.
"That partner's liability does notbecome a liability of the partnership," he added.
European regulators may not look on a dealbetween Andersen and KPMG with much enthusiasm. Antitrust authoritiesthere in the past have frowned upon further consolidation amonglarge accounting firms. Ernst & Young and KPMG abandoned plansto merge in 1998 after close scrutiny by the European Commission.
Andersen and KPMG will probably argue thata merger is the only way to save Andersen, antitrust lawyers said.On its own, Andersen would probably disappear and the number ofbig accounting firms would shrink regardless.
While most local partners overseas are infavor of the wide-ranging deal offered by KPMG, some have expressedan interest in going it alone. And rivals in several countrieshave not been dissuaded from promoting their own merger plans.
The Polish partners, for instance, issueda statement yesterday saying that the "practice is carryingon independent negotiations with the other Big Five firms concerningthe planned merger on the Polish market." In London, DeloitteTouche Tohmatsu has held merger talks with local partners, whileGrant Thornton, the international accounting firm based in Chicago,has expressed an interest in hiring teams of specialists, includingthose in taxation, corporate recovery and corporate finance.
Most foreign practices have so far beenspared large client defections. That is clearly not the case inthe United States, where six of Andersen's largest clients anddozens of other public companies have recently dropped the firm.
The best way to hang onto clients is towin the trial against the Justice Department, and fast, severallawyers said. That very likely means not taking advantage of theusual delaying tactics used by criminal defendants, said RustyHardin, of Rusty Hardin & Associates, a law firm that is representingAndersen.
"Our position is we want a trial assoon as possible," Mr. Hardin said. "We're tired ofbeing beaten around."
That means Andersen's lawyers will haveless time to prepare for trial, but people close to the firm saidthat the risk was necessary and calculated. Of overriding importanceis getting out from under the criminal indictment, these peoplesaid.
Under federal law, Andersen may seek a trialwithin 70 days, but to hurry it further, the firm will need ajudge who is at least somewhat sympathetic to its dire straits.And even so, every day brings more bad news for Andersen, saidJesse H. Choper, a law professor at the University of Californiaat Berkeley.
"I don't think the speedy trial actis going to help them," he said. "The wheels of justicedo not grind that quickly."