FRAMINGHAM (03/01/2000) - Plans by Paris-based Cap Gemini Group SA to acquire New York-based Big Five accounting firm Ernst & Young LLP would substantially increase the European firm's presence in the U.S. and position it as one of the five largest consulting firms in the world, according to analysts.
Earlier yesterday, Cap Gemini announced that it has offered to pay 375 million euros and issue up to 43.5 million shares of stock - or approximately $11 billion, based on yesterday's closing price - to purchase the consulting arm of Cap Gemini.
Cap Gemini America Inc. President and CEO Michael Meyer said that with the acquisition, Cap Gemini Group's U.S. revenue as a percentage of total revenue would almost triple, to 36 percent.
"This is a huge move for (Cap Gemini). They've been trying to penetrate the U.S. market and have only been mildly successful," said Julie Giera, a senior analyst at Giga Information Group Inc. in Cambridge, Mass.
If the acquisition is completed, Cap Gemini could use the Ernst & Young brand name for four years, the companies said in a presentation.
The acquisition would provide Cap Gemini with expertise in strategic consulting, which is Ernst & Young's strength, Giera said. Cap Gemini consultants, on the other hand, have more technical experience in areas such as systems integration, coding and Web site development, she said.
According to published reports, the Securities and Exchange Commission has been putting pressure on the Big Five accounting firms to operate their consulting and auditing practices independently in order to avoid conflicts of interest.
Dale Wartluft, a senior vice president at Ernst & Young Consulting, said that because of that pressure, he is confident that regulators will approve the acquisition.
Wartluft added that separating the two divisions would expand the outsourcing capabilities of Ernst & Young consultants. Some clients who use both tax and consulting services from Ernst & Young would like the consulting arm to "actually run parts of their business," but the company can't provide that service today because of potential conflicts of interest, he said.
Both companies said that the acquisition would help the combined firm compete in the e-commerce consulting market, which will be worth $8.3 billion this year, according to Kennedy Information Research Group in Fitzwilliam, N.H.
Kennedy analyst Joshua Randall said that the consulting industry continues to consolidate in order to capture a share of the e-commerce market.
"Everyone is trying to scale up to take advantage of e-commerce consulting," Randall said. "Everyone needs more people and more talent. Sometimes the best way to get talent is to acquire another company."
In the companies' presentation, they said that if the acquisition is completed, their first step will be to integrate client teams, starting with key global accounts.
Over the next several months, Ernst & Young partners, as well as Cap Gemini shareholders, will vote on whether to approve the transaction. The companies expect the results by the end of June.
If the deal is approved, Cap Gemini will add almost 20,000 new consultants to its ranks, bringing the company's total head count to 58,000.