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Andersen, KPMG in talks on merging outside US

Andersen on Monday started talks with rival KPMG LLP on merging its operations outside the United States, in a last-ditch attempt to remodel the accounting firm before it disintegrates.

Andersen, hit by criminal charges over its auditing of collapsed energy trader Enron Corp.

If successful, a deal with KPMG would raise some much-needed cash and prevent a collapse of Andersen's global network, experts said. It also could help Andersen survive as an independent US firm because it could focus its energies on beating the criminal charges and shareholder suits, they added.

But a transaction could be scuppered by Enron liabilities, objections from regulators in various countries, and some national partnerships deciding to go it alone, they added.

"Their European operations would fit very well together," accounting consultant Mark Cheffers told Reuters. "The issue is whether or not the liability exposure will extend to the European firms."

A merger of the two would create a powerful force, with about 140,000 staff and $12.2 billion in revenues outside the United States. Andersen, the smallest of the Big Five, currently has 85,000 employees and $9.3 annual revenues worldwide, while KPMG has 100,000 staff and revenues of $11.7 billion globally.

It would add about $5 billion in Andersen non-US revenues -- just over half its total -- to KPMG, which has $7.4 billion in non-US revenues. It would add 57,000 Andersen staff to KPMG's 82,500 outside the US.

"Any such combination would create a global network that can continue to provide the best service in every part of the world," said Aldo Cardoso, chairman of the board of Andersen Worldwide, in a statement.

LIABILITY ISSUE

Andersen, facing a firm-wide indictment from the US Department of Justice, is hoping its limited liability structure will contain exposure to Enron-related fines and legal settlements of its US operations, but that was far from certain, Cheffers said.

"The primary issue is how well the limited liability structure holds up in the US courts," he said.

"It could be overturned to open up personal liability and extend overseas -- but that could be a risk KPMG is willing to take."

The two audit firms, looking to combine their operations in Europe, Africa, Middle East, Canada, Asia and Latin America, talked up the deal as a bold global move.

Mike Rake, chairman of KPMG in Europe, the Middle East and Africa, said: "Such a combination would be complementary in terms of geographic coverage and industry expertise."

Meanwhile, US corporations are distancing themselves from the accounting debacle, with pharmaceutical group Wyeth the latest to drop Andersen as auditor. Andersen has lost about 50 clients since the start of the year, including blue-chip firms like Merck & Co.

MONOPOLY PROBLEMS

Any merger would have to be rubber-stamped by various regulators, which could pose a problem.

"I cannot imagine the European Union allowing a merger," said Art Bowman, editor of independent industry publication Bowman's Accounting Report. "I don't think the EU would allow all of the firms (Andersen's clients) to come together to one other firm."

The EU -- keen to ensure that no one audit firm controls the accounting of all the major firms in any one sector -- demanded that Ernst & Young and KPMG shed clients in their proposed merger four years ago. The deal did not go ahead.

If the Andersen/KPMG deal does get the go-ahead, however, it could help Andersen, Cheffers said.

"Some clients (in the US) are fiercely loyal. With the foreign operations carved out, there is higher probability of the US operations surviving," said Cheffers, predicting that a smaller, more focused Andersen would have better luck settling its legal problems and reforming as a well-ordered specialty audit firm.

Earlier Andersen China also said it was holding talks on its future with rival firms in the country, though it was not clear if these talks were related to those disclosed in Europe.

Senior Andersen partners in Britain were threatening to quit, according to sources. That could threaten US partners' hopes of cutting a global merger deal.

Andersen's European operations have been seen as highlights of Andersen's global network and potential saviors were said last week to be keen to cherry pick its best assets here.

Partners at UK rivals and recruitment consultants reported a jump in inquiries from Andersen's UK employees.

"We are seeing an increasing number (of Andersen people)...at all levels," said Martin Purrier of Hunter Walker accounting recruiters.

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