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Andersen options dwindle as suitors exit

Andersen saw its options dwindle on Wednesday when rivals Deloitte Touche Tohmatsu and Ernst & Young said they wanted nothing to do with the embattled accounting firm after reviewing plans for a merger.

Ernst & Young and Deloitte -- which was seen as the most likely suitor for Andersen -- are the first two of the "Big Five" accounting firms to say they definitely won't pursue the Chicago-based firm as long as Andersen faces investor, and possibly criminal, litigation over its audit of the collapsed energy giant Enron Corp.

Andersen is seeking a merger to ensure its survival, but time is running out.

The Department of Justice is pressing Andersen to plead guilty to charges related to its destruction of Enron documents or face an indictment that may already be waiting under court seal, sources familiar with the case said.

Despite Andersen's concern that any indictment or guilty plea could threaten its survival, the sources painted a picture of prosecutors determined to obtain an admission of guilt or do battle with Andersen in court.

Andersen has been in merger talks with other big accounting firms PricewaterhouseCoopers and KPMG, sources have said. But experts say any deal would be tough due to Andersen's legal problems.

"I'm not sure there's a deal to be had here, or that anybody will think, at the end of the day, there will be anything to buy," said Joe Basile, partner at the law firm Bingham Dana LLP in Boston. Basile's pessimistic assessment came even before the Ernst & Young announcement.

"We may see Andersen competitors simply going after the clients directly and then hiring the people necessary to support the clients," Basile added. "None of that has to happen through an acquisition of the entity with all of the worries about liabilities that would tag along."

CLIENTS DESERTING

Top-flight clients, including Merck & Co and Delta Air Lines are bolting Andersen almost daily, and the 88-year-old firm has already been ordered to split its consulting and auditing practices by a special panel it established in response to the Enron scandal.

Andersen has reportedly offered to settle lawsuits from shareholders, creditors and employees for $750 million, though leading shareholders have told Reuters they are looking for at least twice that figure, and do not expect a quick resolution.

Experts say possibilities include a Chapter 11 bankruptcy reorganisation that would insulate any buyer from legal liabilities, overseas partners defecting to rivals, or a crushing blow from the Department of Justice leaving the once-prestigious firm useless.

"A lot of it hinges on what happens tomorrow with the Justice Department," said Jonathan Hamilton, managing editor of Public Accounting Report. "Maybe part of a settlement with the Justice Department will be that Andersen declares bankruptcy so that it can work out a strategy to sell off its pieces."

The idea behind this construction is to cordon off any liabilities -- criminal or civil -- stemming from Andersen's role in Enron's collapse.

ENRON CITED

Indeed, in its terse statement recusing itself of any deal with Andersen, Ernst &Young specifically cited the Enron debacle.

"Ernst & Young has concluded that as long as Enron and other Andersen litigation matters are unresolved, it is not in the best interests of our people, clients, and our firm to pursue such a combination," the firm said.

Deloitte released a similar statement citing the legal problems facing Andersen.

"Deloitte was unable to continue the next stage of discussions due to Andersen's unresolved litigation and legal issues," Deloitte said.

It was not immediately clear how the Ernst & Young and Deloitte announcements might affect other potential buyers. A merger agreement where a remaining Big Five firm would absorb portions of Andersen's business or some overseas operations is certainly a possibility.

"We are in active discussions with Andersen," said a senior partner at a rival accounting firm in Europe on Wednesday. "It isn't something we would necessarily want to do as a global deal, and it may not even be a deal we want to do as a European deal."

Andersen, which employs 85,000 people worldwide, has lost close to 40 clients since the beginning of the year. That accounts for about half the total client losses among Big Five firms in that time.

The firm has fought hard to restore its credibility, and last month hired former Federal Reserve Chairman Paul Volcker to lead a wide-ranging reform effort.

Volcker hastily convened a press conference on Monday to outline new requirements applicable to Andersen centering on a split between auditing and consulting work.

Andersen negotiators have been working on many fronts to salvage the firm but investigations ranging from Wall Street to Washington mean events are largely beyond their control.

"It's a very tough sell," said Basile.

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