Ernst & Young (EY) has said it is earmarking $2.5 billion to fund acquisition for its consulting arm following its planned separation from the big four firm’s audit business.
According to a report obtained from The Financial Times, the war chest will allow the new company, which EY is aiming to float in New York, to double the pace of dealmaking as it battles to win market share from its big four rivals and standalone consulting firms.
New brand: The report noted that it has also planned a budget of up to $400 million to be ploughed into building a new brand for the consulting business, which will no longer use the EY name after the split.
EY’s global leaders are trying to persuade its 13,000 partners worldwide that the consulting arm and the remaining audit business can both grow faster apart, free from conflict of interest rules that restrict accounting firms from advising companies they audit.
Benefits of splitting from audit business: Splitting from the audit business would make acquisitions more attractive for the spun-out consulting arm because it would no longer have to terminate relationships with clients of the acquired company that are audited by EY, said Andy Baldwin, EY’s global managing partner for client service.
- “Every potential acquisition, on average 25% of the revenue we have to say goodbye to on day two because we audit it,” he said. “We won’t have that conflict anymore.”
The Big Four’s federated partnership structures and inability to raise equity funding have limited their ability to make large acquisitions in the past but they have become a larger part of the strategy for expanding their consulting arms recently.
Transactions: EY has done 200 deals in the past nine years, bringing in about $1.5 billion of annual revenue. The firm had revenue of $45 billion globally in the last fiscal year. In the current year, it expects to buy companies with about $400 million in annual revenue, roughly three-quarters of which will be in the consulting business.
Strategic plans: Financial plans for the consulting business after it is floated potentially later this year, if partners vote in favor of the plan and market conditions improve include a $2.5 billion cash war chest, with a target of acquiring an extra $1.5 billion in annual revenue over the next two years, said people familiar with the preparations.
It could also issue shares to fund acquisitions, although it does not plan to start doing so until two years after the split.
Targets would include firms that offer advice on corporate strategy, technology, or environmental, social, and governance (ESG) issues, as well as niche law firms outside the US.
- “When we spoke with law firms that wanted to join us, conversations stopped when they learned about our independence rules, which would have meant a cut of 20 percent of their business,” said Cornelius Grossmann, EY’s global law leader. “Now we can have these discussions.”
Other investment plans after the spin-off include a surge in senior hiring and a boost to technology investments for the tax advisory business.
