Cap Gemini-Ernst & Young Merger Combines Skills

FRAMINGHAM (03/03/2000) - Plans by Paris-based Cap Gemini Group SA to acquire the consulting division of New York-based Big Five accounting firm Ernst & Young LLP this week drew mostly positive support from users, who cited the expertise of the combined firms.

However, one former client said consolidation might lead to less competitive pricing and services.

This week, Cap Gemini offered up to $11 billion in cash and stock to purchase Ernst & Young Consulting. Cap Gemini shareholders and Ernst & Young partners will vote on the deal by the end of June.

Arun Kant, vice president of corporate technology services at New York-based Prudential Insurance Company of America, an Ernst & Young client, said the consolidation would combine the two companies' consulting strengths in strategy and information technology - skills that are needed for e-commerce, he said.

The two firms would also expand their global presence, and that would benefit clients such as Prudential that seek multinational support, said Kant.

Jim Ross, vice president and controller at Richmond, Va.-based CSX Corp., a client of both Ernst & Young and Cap Gemini, said Ernst & Young's attempt to separate its auditing business from its consulting practice would benefit clients.

"If Ernst & Young is the auditor and it happens to get selected [for a consulting engagement], you still have the extra burden to the [client's] audit committee to convince them that it doesn't impair" the auditor's objectivity, he said.

David Pensak, corporate adviser for computer technology at Du Pont Co. in Wilmington, Del., said he's concerned that continued consolidation in the consulting industry would mean less differentiation in price and services.

Pensak's company was once a client of both Cap Gemini and Ernst & Young Consulting.

"Pretty soon, every one of these consulting firms are going to look the same. I see differentiation between them disappearing. I would worry that if I need to get competitive bids on a project, it would be more difficult to do so," he said.

Julie Giera, an analyst at Giga Information Group Inc. in Cambridge, Mass., said Cap Gemini would face a big challenge in retaining Ernst & Young Consulting's 18,000 employees. "If you were a [Big Five firm] and watched one of your competitors sell its business, you would aggressively pursue that 18,000," said Giera.

But Michael Meyer, president and CEO of Cap Gemini America Inc., said the firm would offer equity to Ernst & Young partners and a "significant number" of other senior employees. They would vest over five years, offering an incentive for employees to stay.

But Dudley Brown, managing director of recruiting firm BridgeGate LLC in Irvine, Calif., said he has received phone calls from more than two dozen Ernst & Young employees seeking jobs as a result of the possible acquisition.

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