The sale of EY’s consulting business to French IT services company Capgemini in 2000 was a “value destroying” move, with culture shock and an unexpected economic downturn leading to mass job cuts less than two years after the deal, according to former leaders at both firms.
New attention is being paid to the two-decade-old transaction, due to the revelation that EY has called in investment banks JPMorgan and Goldman Sachs to advise on a possible listing or sale of its consulting business.
Capgemini (then Cap Gemini) purchased the consulting arm of EY in 2000.
The troubled aftermath of the sale offers lessons for EY’s current partners as they contemplate splitting the firm. Veterans of both firms say that the sale in 2000 was hurt by a combination of incompatible corporate cultures, an economic downturn, and shares that unexpectedly lost most of their value while in lock-up.
Looking back, the main winners out of the deal were the EY audit partners who managed to get some payment for the sale of the consulting arm and began rebuilding their consulting businesses after the expiry of a five-year non-competitive clause with Capgemini.
In March 2000, Cap Gemini (now Capgemini) paid $US11 billion for the 18,000-strong Ernst & Young (now EY) consulting business. By January 2002, tumbling sales and profits led to Cap Gemini’s leaders cutting 9 per cent of its 60,000-strong workforce, with many of the highly paid EY partners targeted as part of the exercise.
“It felt very exciting initially for the consulting partners. It would be a brave new world, we would make lots of money, everything was good,” said Andrew Keene, a partner at EY who moved to Cap Gemini as part of the deal.
“It soured quite quickly. Cap Gemini was a French-run corporate where decisions were made far away, plus you had the dotcom downturn.”
An article from the Information section of January 3, 2002, edition of The Australian Financial Review.
An article, “Cap Gemini cuts staff after merger flop” from the January 3, 2002, edition of The Australian Financial Review stated that “the honeymoon was brief” for the combined co-operation.
“Profits at Cap Gemini Ernst & Young are set to fall by more than half this year, to $US154 million on sales of $US8.1 billion, as the firm’s clients slash tech spending in the face of a global economic slowdown,” the article stated.
The organisation had already “slashed 9 per cent of its 60,000-strong workforce” and was about to embark on a “new round of 2500 lay-offs and other cost-saving measures”.
Mr Keene said the French company had a “focus on quarterly results and they realised the quickest way to save money was to fire the overpaid EY partners”.
“The problem was they were the people who were generating the business. The EY partners were the guys bringing the business in and when they got rid of us they got rid of their business development [sales] people.”
Another former EY and Capgemini partner said the deal had been “value destroying” for the shareholders in the French company.
The former partner said the French company was very transaction-based, while the EY consultants were relationship-based professionals with contacts across the corporate landscape. He did not want to be named for fear of upsetting his previous colleagues.
Former EY partners also spoke about how the payday from the sale was hurt because they were paid in Capgemini shares.
At the time, EY partners received a set number of shares determined by their rank within the firm, with senior partners receiving parcels worth millions of dollars.
However, the terms of the deal dictated that only a portion could be sold when the deal was struck, with the remaining unable to be sold for more than four years.
By the time that lock-up period ended, the remaining shares had lost about 80 per cent of their value, the former partners said.
The then audit-only EY quickly rebuilt its consulting arm once the non-compete clause ended.
In a Financial Review article from 2018, an EY senior partner described how the local arm of the firm had already built up a consulting business of 150 partners and staff.
“Re-entry to this market really happened in 2006, when we established a small team of partners … our approach is to offer a higher level of advice from seasoned professionals, rather than improvising bodies for assignments.”
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