Protiviti Responds to Tough Financial Crisis, Now More Bullish

Protiviti, as many will recall, was principally Andersen’s internal audit service line, and these professionals joined the multi-billion dollar organization Robert Half International ($RHI) in 2002 to form their own division, separate from the staffing units for which RHI is better known for – Accountemps, Office Team and Management Resources. Starting with just over 700 employees in 25 locations, Protiviti has certainly grown in size and scope, and now is a global business consulting and internal audit firm providing risk, advisory, and transaction services; with 2,500 professionals in 62 locations in 17 countries worldwide. The Protiviti division accounts for 13% of total parent company RHI revenues; and within Protiviti itself, international operations were 30% of total Protiviti revenues.

All the senior management at Protiviti continue to be Andersen alumni:

Joseph A. Tarantino, President and Chief Executive Officer, ex-head of Arthur Andersen’s Financial Services Assurance practice for metropolitan New York
Carol M. Beaumier, Executive Vice President, Global Industry Programs, ex-partner in Arthur Andersen’s Regulatory Risk Services practice
Robert B. Hirth Jr., Executive Vice President, Global Internal Audit, ex-partner with Arthur Andersen
James Pajakowski, Executive Vice President, Global Risk Solutions, ex-partner with Arthur Andersen
Gary Peterson, Executive Vice President, International Operations, ex-partner at Arthur Andersen

We haven’t focused on Protiviti for the longest time, but our attention was brought back after seeing RHI’s full year 2009 results. We were quite surprised to see that despite its size, Protiviti had a full year 2009 loss. Yes, a loss of $30 million for the entire year on revenues of $384 million.

To dig deeper into this situation, we had to go back all the way to 2007, analyze a whole series of quarterly earnings and read through multiple earnings transcripts (courtesy: SeekingAlpha.com).

An interesting picture emerges from our analysis, vividly demonstrating the intensity and rapidity of the global slowdown, and consequent management efforts to cope with business shrinkage.

In 2007, Protiviti had revenues of $552 million, gross margin of $175 million (32% of revenues), and operating income of $21 million (4% of revenues). In 2008, revenues held reasonably flat at $547 million, but gross margin had decreased by $20 million to $155 million (28% of revenues), and operating income fell by $14 million, a full 66% to $7 million (1% of revenues). In 2009, the situation had rapidly deteriorated, with revenues falling 30% to $384 million, gross margin plunging by $75 million to $80 million (21% of revenues), and operating income declining precipitously by $38 million to a net loss figure of $(31) million (negative 8% of revenues). In a matter of just 24 months, Protiviti’s top line had eroded by 30% and its operations had gone from a healthy profit to a huge loss.

A deeper look at the quarterly earnings for two full years, 2008 and 2009, reveals the full extent of the situation.

In 2007, Protiviti had good operating results, with 3,300 employees, up a whopping 16% from 2006, as management hired talent in sync with increased demand for its services.

From Q1-2008 to Q3-2008, in the first three quarters of 2008, revenues continued at the 2007 quarterly run-rate of about $140 million, but total costs, principally direct compensation costs from all the increased staff levels were up 4%, increasing from 68% of revenues in 2007 to 72% of revenues in the first three quarters of 2008. Things were still on a decent footing at that time, operating income was a few million dollars profit on the average each quarter, not at 2007 levels, but certainly not at losses either. The expected increase in 2008 revenues had not been seen, and the increased cost line continued to pressure Protiviti’s profits. A review of the Q3-2008 quarterly earnings call shows that management was cautiously optimistic about Protiviti’s performance and prospects, and there were initial efforts to bring costs in line with flat revenues. Given that RHI had not ever managed Protiviti through a downturn, senior management could not provide decent guidance on revenues for the upcoming fourth quarter.

Then, with the collapse of Lehman Brothers in September 2008, the financial crisis became really severe in Q4-2008.

In Q4-2008, Protiviti’s revenues fell to $125 million, $15 million below the run rate seen in the last three quarters, but Protiviti had already started moving to reducing its cost base. Both direct costs and SG&A costs were quickly reined in, and the cost base in Q4-2008 was reduced by $12 million in comparison to Q3-2008, to almost offset the $15 million loss in revenue. Overall, operating income for Q4-2008 decreased to $1 million from $4 million in Q3-2009.

At the end of 2008, Protiviti had seen flat revenues to 2007, but a sharp drop in profits. The firm had 3,200 employees, 100 lower than the 3,300 at the end of 2007, through some initial layoffs. Its likely no-one imagined how 2009 would turn out.

In Q1-2009, Protiviti’s revenue fell to $100 million, $25 million below Q4-2008 (some of this was attributed to seasonally slow first quarters), but this is when Protiviti really started to manage its employee base. It took an $8 million extraordinary charge in the quarter for severance costs, with an intent to manage its employee compensation costs in line with falling revenues. There was also a contemporaneous reduction in SG&A, but the quarter still ended with a $11 million operating loss, as total costs in the quarter could not come down far enough with the rapid decline in revenue.

In Q2-2009, quarterly revenues had fallen another $10 million to $90 million, however, the cost base also fell by $10 million from the previous quarter and the operating loss position of $11 million held steady from the prior quarter. Protiviti took an additional $2 million employee severance restructuring charge in the quarter. By this time, management had recognized the severity of the issue and were taking active steps to manage costs in line with declining revenues. Management said that US operations had better profitability than international operations, which were being scrutinized in detail. Also, the division was taking steps to diversify away purely from Internal Audit and Sarbox type work into IT audit and co-sourcing to create a larger set of non-correlated service lines.

By Q3-2009, the positive cost impact of the reductions in staff were showing on the bottom line. Q3-2009 revenues were $96 million, a good $6 million better than the $90 million in Q2-2009 in terms of revenue, with the third quarter being sequentially generally better than the second quarter. Costs in Q3-2009 were also $7 million better than Q2-2009, with the net result that operating profit increased by $12 million from Q2-2009 to Q3-2009. Q3-2009 turned in a small operating income of $1 million. Q3-2009 gross margin% matched what were historical levels in the first half of 2008.

In Q4-2009, the operating situation was quite similar to Q3-2009, as revenues and costs generally held steady and flat. Revenue was $96 million, staff utilization improved and operating income was essentially zero.

Protiviti ended 2009 with $384 million in revenue, 30% lower than 2008, and with an operating loss of $21 million (net of restructuring charges) compared with $7 million of operating profit in 2008. The big change in 2009 was the employee base, the year ended with 2,500 employees, 700 employees lower than the end of the previous year. This was a gut-wrenching 22% reduction in staff, in that 1 out of every 5 professionals with Protiviti who was working at the end of 2008 was no longer at the firm in 2009.

As we turn into 2010, management appears much more bullish about Protiviti’s 2010 prospects and indicated generally that the division will aim to generate positive operating profit for this year. The problem seems to lie in Protiviti’s operations outside the US, which are offsetting a higher level of US profitability, and there seems to be serious effort to turn that around. It indicates that operating costs levels have now been sized to a $400 million revenue business; and anecdotal evidence at Protiviti consultants indicates there is growing confidence that there will higher levels of business in this year.

Anyone who has passed through this crisis will recall with clarity how difficult the last quarter of 2008 and the first half of 2009 really was. This is a case study on Protiviti, but likely representative of all consulting and accounting firms, who faced and continue to face a crisis unprecedented in modern times. The decline in Protiviti (a Big 4 firm spin off) is in line with the decreases in Advisory service lines at the Big Four firms, however the magnitude of the fall is much higher at Protiviti, much to its smaller size and smaller footprint in higher-growth emerging countries of the world.

While we have been able only to tell the story from the public financials, we do recognize there is a deep human cost, in terms of lost jobs, continued unemployment, potentially poor morale, and tough disengagement and working conditions. We invite Protiviti alumni to join the Big4 LinkedIn group, which has a robust discussion and job board to extend their network and keep abreast of developments. And if any of our readers have first-hand or deeper knowledge of this situation, we welcome your comments.

PricewaterhouseCoopers And Satyam: Recent Twists and Turns

We have blogged earlier about PricewaterhouseCoopers, the official auditors of Satyam, the Indian IT firm, scalded by the scam perpetrated by its Chairman Ramalinga Raju. Since then, Satyam has been bought by Tech Mahindra and Deloitte has been hired as the new statutory auditors. All this has happened in a space of one year, with Ramalinga Raju being arrested on January 9, 2009, he is reportedly in the hospital now, though his brother and the Satyam CFO and other key officials are still imprisoned.

This case continues to twist and turn, and here are some very recent developments from the Indian press (mainly The Economic Times (www.economictimes.com) and CNBC-TV18 (www.moneycontrol.com):

First and most recent, the Supreme Court of India today granted bail to the PricewaterhouseCoopers partner Mr. T Srinivas, on the basis that the bulky charges (over 55,000 pages) could lead to a long-drawn trial in the case and the accused was already lodged in jail for over a year. The judges decided it would be of no use to keep the accused in jail, where he had been since his arrest on January 24 2009. Mr. Srinivas has been asked to post bail of about US$40,000 and two sureties. The court also directed Mr. Srinivas to appear before the police in the first week of every second month and not to tamper with the evidence or influence witnesses in the case.

Second, the scam has had larger impact on the PwC Indian firm, with about 200 professionals leaving PwC India for other firms, mainly due to adverse reputational impact. This is considered one of the highest and quickest attritions in Indian professional services. These 200 employees include the 19 partners who left along with Dinesh Kanabar, the widely-regarded head of PwC’s tax practice, who joined rival firm KPMG as deputy CEO in December 2009. These employees, across all level of professional services, have apparently moved onto other Big Four firms in India - KPMG, Ernst & Young and Deloitte. Reportedly, PwC has been trying to control attrition by attractive bonuses and larger professional roles. Note that PwC India has 6,500 employees, so this 3% by itself is not an unusual attrition level, but the rapid outflow in a short amount of time following a reputational event makes it all the more critical.

Third, recall that PwC India had made serious changes to the top management of the Indian firm, also bringing in Gautam Banerjee as the new Chairman from PwC Singapore in December 2009.

Fourth, in a recent interview with Dennis Nally PwC Chairman with CNBC-TV18 India TV, he acknowledged that the Satyam scam had hurt the PwC brand, saying, “Without question the firm has had real challenges in India but that has not changed my outlook and view on the importance of India economy to global economic picture….It is going to take sustained performance and nothing short of that. Everything we do is a matter of focus. …If we do that and we do that consistently over a period of time the PwC brand in India will be as strong and as good as it has been in the past and where we want it to be into the future.”

So this case moves on, leaving behind tons of collateral damage for all concerned. We can all ask how the auditors could have missed lining up company statements against bank statements to see whether the cash reported was really in the bank. Relying upon company management, however convincing they may be, should not have precluded independent investigation. That’s true auditing, isn’t it - an unbiased, critical and dispassionate view coupled with focus on the truth and unstinting efforts to show accurate financial information. Till the entire story comes out, we’ll never know what really happened, but deep inquiry at the right time could have prevented this crisis and taken it out at the bud.

The Next Four: BDO, RSM, Grant Thornton and Baker Tilly. And A Surprise

We recently published our extensive financial analysis on the Big Four Firms (read here,  download here), and with some recent revenue announcements by the next set of firms, here is a brief overview of The Next Four, the second set of international but smaller accounting firms.

As you can see below, these are large complex organizations in their own right, and likely to place in the global Fortune 500 as independent entities. They are multi-billion dollar, multi-firm, transnational enterprises, with presence in 100+ countries, and providing a wide variety of accounting, tax and advisory services. In another industry, they would be good contenders for top positions, but the sheer size of each of the Big Four firms totally dwarfs their presence in the accounting & tax firm sector. Consider that the combined revenue of these four firms (~$16 billion) is less than the revenue of the smallest of the Big Four firms (KPMG at $20 billion).

To recap:

First, PricewaterhouseCoopers, still the largest firm in the industry
Second, Deloitte, just a bit behind PwC
Third, Ernst & Young
Fourth, KPMG, the smallest of the Big Four firms

Fifth, and a distant follower to KPMG is BDO International, which had total combined fee income for all BDO Member Firms of US$ 5.026 billion for the year ended 30 September 2009, a creditable year over year increase of 1.7 % in euro terms but a decrease of 2.3 % in US dollars terms. In local currency terms, excluding the effect of all currency movements, revenues actually increased 4.5%, with the appreciating US dollar reducing this by about 7% when results were reported in US dollars from 2008 to 2009.

Europe and North America both decreased combined fee income, but Asia Pacific, Middle East and Sub Saharan Africa regions each had an increase of some 20% in Euro terms. Latin America grew by almost 10% in Euro terms.

Audit & Accounting grew by 4.5%, Tax fell by 3.9% and Advisory services fell by 10%. The total number of people increased from 44,002 in 2008 to 46,035 in 2009, while the network’s offices grew from 1,095 to 1,138 over the same period.

In recent news BDO Seidman, the US member firm, simply became BDO.

Sixth, and jumping over Grant Thornton to take that sixth spot is RSM International with 2009 worldwide revenues of US$3.87 billion, up a solid 8% from 2008. Of this global revenue, Americas have US$2.65 billion, Europe has US$837 million, Asia Pacific has US$349 million; and Africa & Middle East with a small figure of US$36.8 million. RSM International has 32,492 people, comprised of 3,150 partners, 23,262 professional and 6,080 administrative staff in 736 offices in 76 countries.

There were some bright spots for RSMI which led to this increase. In 2009, Singapore and China revenues rose 31% and 17% respectively, with good showings from Philippines, New Zealand, Indonesia and Malaysia. Revenues in Belgium shot up 69% due to a local merger while member firms in Malta and Portugal also grew by over 25 percent each. RSM Tenon, the newly merged UK member firm, increased the UK firm revenues to US$406 million.

RSMI’s 8% increase in revenue was a key factor in displacing Grant Thornton from sixth place, as Grant Thornton’s revenue went the other way, dropping by 9%.

Seventh, and just behind RSM International is Grant Thornton International (losing that sixth spot), with combined global revenues of $3.6 billion from its 96 member firms for the year ended 30 September 2009. Revenues for 2009 were flat in local currency terms from 2008, but declined 9% in US dollar terms from 2008.

Assurance revenues at $1.6 billion (46% of total revenues) increased 5% in local currency terms but dropped 4% in US dollar terms against 2008. Tax revenues of $763 million (~25% of total) were flat to 2008 in local currency terms but were down 9% in US dollar terms. Specialist advisory services revenues were $884 million (25% of global dollar revenues), down 5% in local currency but down 16% in US dollar terms

Latin America and the Caribbean had solid local currency growth of 13%. Europe, Middle East & Africa revenues were flat at local currency terms. Greece (up 11%), Poland (12%) and Belgium (19%) were top performers. 2009 North American revenues were down 1% from 2008. Asia Pacific revenues were up by 14% at constant exchange rates, helped by a 23% increase in revenues by the India member firm.

Grant Thornton’s 9% drop in revenue led to its displacement as the sixth largest accounting firm in the world. An unexpected surprise indeed.

In Eighth place is Baker Tilly International with 145 member firms in 110 countries and 2,800+ partners and 25,000 people. Baker Tilly’s revenues for fiscal year 2008 were US$2.95 billion, up 18% from 2007. We could not find Baker Tilly’s 2009 revenues, but presume they were higher than 2008.


According to the recently published rankings of 40 accounting organizations from the International Accounting Bulletin's annual world survey, average network revenues dropped 6% to $122 billion and average association revenues increased only 3% to $20.8 billion. The Bulletin says that this is a nearly a 20% revenue turnaround for networks with some of the largest firms affected, corroborating our earlier analysis of the Big 4 firms. Only two firms in the top 10 - RSM International and Baker Tilly were able to increase their revenues from 2008 to 2009.

The Bulletin further noted that Audit demand was affected by severe fee reductions, as high as 40% in come cases. Tax demand suffered as clients generally paid less tax, affecting the appetite for tax planning advice. But the most impacted was corporate finance with 2009 being the worst year for M&A deals since 2004. Restructuring services were in good demand. Most firms noted heavy investment in Asia-Pacific, with Asia Pacific, the Middle East and Latin America reporting solid growth.

The IAB predicts, as we did in our analysis, “If the networks’ recent growth trends continue, Deloitte will overtake PwC this year.”

Note that the revenues for the Big Four firms fell 7% from $101 billion in 2008 to $94 billion in 2009. In 2009, it is interesting to note that the total global revenues of all the other 36+ large accounting firms combined were only $26 billion ($122 billion minus $94 billion). And the 6% drop in the industry is largely defined by the 7% drop in the mega Big Four firms (PricewaterhouseCoopers, Deloitte, Ernst & Young and KPMG).

The IAB’s analyis is in sync with our findings, and the big surprise is clearly RSMI’s move to the sixth spot, swapping places with Grant Thornton. We shall look out to next year where there are two close races: Deloitte versus PricewaterhouseCoopers to be the largest accounting firm on the planet and RSMI versus Grant Thornton for sixth and seventh spots.

Ernst and Young Says Companies Tiptoeing Into 2010, Still Nervous

Ernst and Young just came out with some survey results which suggest that the overwhelmingly positive outcomes we have seen from recent PricewaterhouseCoopers and KPMG global surveys needs to be tempered with a bit of caution.

While the firm finds that the situation is drastically different in December 2009 as compared to December 2008, there is some element of hesitation on part of executives to declare that all is bright again on the horizon. Leaders still seem to be a bit nervous about the recovery and companies are tiptoeing cautiously into 2010.

In January 2009, 75% of companies were focused on their own survival and only 19% were trying to leverage the recession to pursue new market opportunities. But by end of that year December 2009, 34% were considering pursuing new opportunities; but get this – over half (53%) of companies still agreed that surviving 2010 would still remain a challenge.

John Murphy, Global Managing Partner - Markets, Ernst & Young aptly said, "The spirit of optimism has increased, but it is essentially fragile in nature. A pick up in confidence is not surprising, given the massive global government stimulus working its way through the economy and the larger developing and emerging economies beginning to rebound. Companies may be less worried about survival over the next 12 months, but the return to a healthy operating environment is still some way off."

But all was not bad, 33% of companies increased their EBITDA by over 5% in the last 12 months. And further, 7% of all businesses had seen a more than 20% increase in earnings. This trend seems to be more prevalent in mid-sized companies in the relatively robust Asia-Pacific region, with 45% reporting a 5% EBITDA increase, in Latin America (26%), Western Europe (28%) and Eastern Europe (29%) the proportion was lower. 40% of pharmaceutical, aerospace and defense and banking companies exceeded the 5% growth threshold. Companies in the oil and gas, manufacturing and automotive sectors were far more likely to report flat or declining earnings.

 

While the worst of the crisis is over, a good 33% saw revenue growth returning within six months, one-third said by the start of 2011 and the final third not for at least two years. After all the cost cutting is done, the path to value clearly lies through revenue growth, what Ernst and Young calls the “growth crisis”. 64% thought optimizing the markets they serve via new market entry, new products or new channels, and through revitalizing the business model with new thinking around organizational structure, core competencies and new business collaborations.

 

In typical consultingese, Ernst and Young reveals its 9-sided “performance wheel” which includes all the actions organizations can take to enhance stakeholder value. According to E and Y, high performance companies (taking a page from Accenture’s book) are distinguished from lower performance companies by the emphasis they place on these following parameters AND their capability to execute on the goals they set for these strategies. The four key delineating areas are:

1. Optimize market reach
2.  Strengthen management talent
3. Accelerate decision making and execution
4. Strengthen stakeholder confidence

So this study is partly result reporting and partly prescriptive. The urgency of the current moment creates the imperative to change, change whatever you’re doing for the better in multiple dimensions to continue to be relevant and value-creating.

 

Our takeaway from this survey is the tinge of realism that is not evident in the glowing results from other firms coupled with the specific directions that successful companies have taken to manage creatively through this downturn. The agenda for change along 9 dimensions can be a bit hard for management to grasp, but a prioritization of elements and then a ruthless focus on what counts can get companies to get better situated for revenue growth and pushing through the lag end of the crisis.

 

The full study for those interested in the detailed results is at

 

 

See the full study pdf here 

 

 

 

Ernst And Young Finds IPOs Perking Up As Capital Markets Improve

Coming on the heels of two executive confidence surveys by other Big Four firms, which corroborate general increase in optimism, here’s another data point, this time from the capital markets which further confirms that recovery is imminent.

Ernst & Young LLP’s just released Q4-2009 quarterly US IPO Pipeline report shows that US IPO activity did increase sharply in that quarter, making it the best of the last two years and matching levels we saw before entering this slowdown. Consider that the US economy did grow by around 6%, a record in recent times in the same quarter. 53 companies entered into registration in the quarter, 30 IPOs were launched and the overall pipeline increased to 54, looking for $10.3 billion from the markets. Consider this large 59% jump from just the previous quarter Q3-2009, with 30 new registrants, 14 companies that went public and a resulting pipeline of 34 registrants.

Clearly the IPO market is on the mend. See our previous blog post on the Q3-2009 IPO activity led by China and Brazil. Q3-2009 Global IPO Activity blog post

The year over year comparisons also show why this quarter was important for the IPO market. In Q4-2009, there were 54 registrants, $10.3 billion of deals with the average deal being $273 million. A year ago, in Q4-2008, there were 57 registrants, $15.5 billion of deals with the average deal being $187 million. Two years ago, in Q4-2007, there were 90 registrants, $16.8 billion of deals with the average deal being $187 million.

So while Q4-2009 was not large in terms of volume, it does represent a big increase over the dismal numbers we have seen in previous few quarters. The big run up in capital market is emboldening private companies to seek capital markets, and on the other side, investors can now think of taking some risk to bring in some returns. And the next few months will likely show much higher activity as positive trends continue.

In terms of US regions, the West was most active with 21 companies in registration to raise $3.6 billion. The Southwest had 5 companies, and looking for $2.4 billion, while the Midwest also with 5 companies sought $1.2 billion. With tech leading the charge, California had the highest level of activity among the 50 states with 18 companies in registration.

According to Jackie Kelley, Ernst & Young LLP, Americas IPO Leader, “Finally, the markets are opening up to represent their historic diversity – a range of deal sizes, pre-recession averaging at about $190 million, and a variety of industries led by technology. The next few months are shaping up to be a key period of activity.”

Deloitte: Worst Behind Us. Hiring and Retaining Talent Are Top Priorities

We just talked about PricewaterhouseCoopers’ 13th annual global CEO survey, which showed a remarkable improvement in CEO confidence this year as compared to last year 2008.

Deloitte also has recently come out with a study which validates the general improvement in optimism. In fact, Deloitte says that not only are executives more positive, but that “economic optimism has reached its highest level among surveyed executives since the study’s inception.”

That’s encouraging news. More than 33% of the 335 surveyed executives now think the worst of the recession is behind us as organizations are now focused on the right balance between offensive and defensive talent strategies. What this means is companies who were generally using the downturn as an excuse to cut heads or to freeze salaries can no longer look to that option, but have to gear up to either begin to retain existing good talent or to become ready to attract people to join their enterprise. Certainly, this is excellent news for the unemployed, the underemployed and those generally dissatisfied with their current jobs. That today’s news showing the US GDP soared in the fourth quarter of 2009 indicates the economic world is looking up and the worst has passed, and that growth may be just months away. The Deloitte research is focused more on the employment and talent aspect of executive confidence, and given today’s jobs environment, that is exactly the right set of questions to be asking top executives.

According to Jeff Schwartz, principal, Human Capital, Deloitte Consulting LLP, “Looking into the recovery, companies can no longer depend on the recession as their primary retention strategy for keeping critical employees. We expect executives to continue to shift their talent portfolios from ‘defensive’ measures, such as cutting headcount and focusing primarily on costs, to ‘offensive’ programs, including retention of critical leaders and workers and increased spending on training and development with a focus on leadership.”

Here are some key findings:

Companies are (Cautiously) Optimistic
35% of executives predicted the worst of the economic crisis is behind us, which is “the highest level of economic confidence since the survey began in January 2009.”

Talent Priorities are Shifting, Albeit Slowly
However, 35% still said reducing employee headcount remains the leading current talent priority, followed by retention (28%) and training and development (25%). Another piece of good news: only 39% of talent managers and executives anticipate additional layoffs in the next three months, compared to 51% who see no layoffs on the horizon.

Training and Development Yield World-Class Talent
40% executives expect their companies to increase programs aimed at developing high potential employees (47%) and cultivating corporate leaders (43%).


We have been saying all along that these horizontal and vertical surveys conducted by the Big Four firms across geographies, industries and time periods are an excellent indicator of how the global economy will perform. All through the last 18 months, we have reported on surveys which reached the lowest levels that we have ever seen, but of late we are now seeing rapid snapbacks in confidence, optimism, positive expectations to unanticipated levels. All this means, that unless everyone is simultaneously wrong, all economies and sectors are improving rapidly in 2010, and good days are not that far away now.

KPMG Predicts Modest Uptick in Global Mergers and Acquisitions

With the new year 2010 just open, the forecasts for the year ahead have started.

First out is KPMG’s Global MA Predictor which estimates that M&A appetite and capacity will move up in the next 12 months, with increased forward PE ratios from a year ago pointing to a higher deal-making appetite. Furthermore, the capacity to do deals is heightened by a decline in net debt to EBITDA ratios from earlier levels.

Let’s just clarify how this predictor works. It looks at forward Price to Earnings (PE) ratios and net debt to earnings before interest, tax, depreciation and amortization (EBITDA) multiple to track and establish the potential direction of M&A activity for the world’s 1,000 largest companies by market capitalization; and then looks at these ratios over time. The PE ratio tests for “paper appetite” i.e. the relative preparedness of companies, sectors and regions to originate deals on the basis of share values only. The net debt to EBITDA ratio tests for “debt capacity” – that is, the relative ability of companies, sectors and regions to originate deals using debt only.

Simply put, if the price to earnings ratios for the world’s largest public companies are higher, then their stock (the “currency” to do deals) has more buying power, and they can potentially more deals by issuing higher-priced stock. Simultaneously, if the debt on their books has reduced relative to their operating earnings, then they can take on more debt and still be financially solvent, which again increases their capacity to do acquisitions and issue public debt. The approach is fairly sensible, though statisticians would say these are just necessary, not sufficient conditions for upcoming M&A activity.

At the beginning of 2010, it appears that both ratios are working in favor of better deal making. Forward PE ratios are now at 14.0x for 2010 versus 13.1x for 2009, while net debt to EBITDA ratios are expected to decline by 18% from 1.5x to 1.2x. These factors now indicate a slow but sure enhancement in the global deals market over the next 12 months even though credit markets remain tight.

Looking across the world, Latin America shows the highest increases in PE ratios, moving up 62% from 8.9x to 14.5x, followed by AsiaPacific (exc. Japan) at 35%, Africa & the Middle East at 13%, Europe at 7% and North America at 4%.

On the other indicator, net debt to EBITDA ratios, Africa & the Middle East forecasts a 37% decline (down from 0.8x to 0.5x), followed by North America at 24%, AsiaPacfic (exc. Japan) at 20%, Latin America at 18% and Europe at 15%.

Across sectors, Basic Materials posted an excellent combination of results with forward PE up by 17 % and net debt down by 32 %. Technology and Non-Cyclical Consumer Goods also had 20 % and 16 % increases in PE ratios respectively. On the debt side, Healthcare and Cyclical Consumer Goods dropped 41 % and 23 % falls.

So what KPMG is really saying is that, improved equity value levels since March 2009 and companies aggressively paying down debt have created good conditions for public companies to go out and buy companies this year. Forward PE ratios (which use equity analyst estimates) have also become realistic as equity analysts have concurrently brought down target prices and moved up EPS estimates.

There is one more interesting point in this analysis, which is that corporations are also competing with private equity firms for the same targets, but KPMG believes they hold a better position this year. According to KPMG’s David Simpson, “…Even though we have seen some resurgence in private equity deals, that sector of the market will continue to be hampered by a shortage of debt, putting it at a comparative disadvantage to corporates. The Predictor shows that corporate appetite and capacity are expected to increase - so we may confidently expect that corporate M&A will lead the way in 2010.”

Predictions are just that, we have seen very dull M&A activity all across the globe in 2009, but the Kraft – Cadbury deal, the purchase of Burlington Northern by Berkshire Hathaway, Deloitte and PwC’s purchase of BearingPoint, Cisco’s acquisition of Starent and Tanberg, in recent months indicate that public companies are gearing up for more deal making. Private equity has been eerily silent.

There appear to be better news for M&A participants in 2010, and time will only tell if KPMG is accurate, but we cannot but surmise that things have to be better than 2009, which will go down in world financial history as likely one of the worst periods for M&A activity.

PricewaterhouseCoopers Finds CEO More Confident, Hiring

PricewaterhouseCoopers typically releases its 13th Annual Global CEO Survey (1,200 CEO interviews in Q4-2009) in sync with World Economic Forum at Davos.

Last year, CEOs were feeling insecure and diffident about the future of the global economy and of their companies.

See what we said in our blog post last year



How things have changed. Since we saw the worst of the recession in March 2009 and the huge spring back in equity markets, it also appears to have boosted executive confidence.

The current survey is much more encouraging, top business leaders are feeling better, exuding more confidence and generally inclined towards hiring than slashing costs. This survey is in line with other confidence measurements put out by the Big Four firms, and as we have said earlier, these surveys are an excellent barometer of when the global economy will bounce back. And now it seems, that recovery is imminent.

A majority, 81% of CEOs worldwide are confident of their prospects for the next 12 months, only 18% are pessimistic. Contrast this with 2008, when 64% were confident and 35% were pessimistic.

And this brings good news for the unemployed and the underemployed.

40% of CEOs plan to hire this and 25% were planning job cuts over the coming next year. Contrast this with 50% who actually cut headcount in the past 12 months.

In Asia Pacific and Canada 50% of CEOs wish to increase employment in 2010, and do so 60% in Brazil. 20% of UK CEOs are even more bullish, they expect headcount to rise by more than 8% in 2010.

31% of CEOs are now "very confident" of their short term prospects, up from 21% last year, the lowest point in CEO confidence since PwC began its tracking.

There is a large discrepancy between developing and emerging countries. 80% of North America and Western Europe CEOs are were confident of growth in the next year, but this zooms to 91% in Latin America and in China/Hong Kong, and 97% in India. Looking at the longer term, more than 90% of CEOs expressed confidence in growth over the next 3 years.

When will this recovery happen? 60% of CEOs expect recovery in second half of 2010 or later (developed countries), while 13% quite confidently said recovery was already underway (China), and 21% bet on H1-2010 (emerging markets).

Here are some other key findings of this survey:

Fears for the future
Protracted global recession is the biggest overall concern, followed by fear of over-regulation, instability in capital markets, and exchange rate volatility.

Love-hate relationship with regulators
66% of CEOs disagreed with the notion that governments have reduced the overall regulatory burden, also opposing government ownership in the private sector even in the worst of times.

Combating the effects of recession
90% of CEOs had initiated cost-cutting measures in the past 12 months, led by those in the US, Western Europe and the UK. And get this - 80% will continue cost cutting over the next three years.

Public trust and consumer behaviour
25% CEOs believe their industry’s reputation has been tarnished by the downturn, but 50% CEOs are concerned that the recession caused a permanent shift in consumer behaviour.

Risk management
41% of CEOs plan to make major changes to their company’s approach to managing risk.

Climate change
More than 60% of CEOs are preparing for the impact of climate change initiatives.


Dennis McNally, PwC Chairman, summed up, "CEOs will be in a post-survival mode in the coming months. Their most common regret about how they dealt with the recession was not fully understanding the risks, and failing to respond more quickly. The importance of managing risk was the most often cited lesson to emerge from the financial crisis. CEOs are learning to balance risk management with decisiveness and flexibility as they seek to return to prosperity."

Mr. McNally was interviewed on Bloomberg on the results of the survey. Check out Bloomberg.com/Davos2010 videos.

Apple iPad Priced at $499, Impact on Deloitte Study

So Apple just announced the price of the iPad at $499 and that it will be available in March and April 2010.

We earlier had speculated a price of $1,000 and 20 million units, at half the price, lets assume that price-elasticity moves the numbers sold to 35 million (Note that Apple just announced it had sold 250 million iPods), the incremental sales are $17.5 billion, that's only a few billion below our previous number.

There'll be a lot of analysts with better predictions of volume, and we trust Deloitte with a known price point can do an update of their study with more accuracy, and we'll come back with our response

Deloitte Expects Tens of Millions iPads Sold

Apple just today displayed to the world its much anticipated ipad tablet PC, with Steve Jobs wowing the crowd with its amazing functionalities. Finally, speculation on the name was laid to rest - the ipad is just a vowel away from the ipod! Boring as the name is, the potential for this device is simply huge.

The ipad is the big brother of ipod, it has all the cool features of the ipod on a much bigger screen, as also allows gaming, reading of books and watching of movies without the disadvantages of a smaller device.

In a press release today, Deloitte estimates that the "Goldilocks" device will be sold in the "tens of millions" this year alone. And why the Goldilocks moniker, its not too big (as a PC), its not too small (as an iPhone), yes - it's just right!!

The ipad fills a niche between smartphones (too small for watching videos or internet) and notebooks and PCs (too heavy or expensive). And here's the brilliant part, they will not cannibalise either segment, but become a utility device which adds to the growing ubiquity of computing in every household, creating a scenario where "connected, browser based devices become as ubiquitous in the living room as scatter cushions.”

Apple did not quote a price on this device, but lets say for argument's sake it is $1,000. If 20 million were sold, that is $20 billion in revenues alone from this product. Note that Apple's Q4-2009 revenues were $12.5 billion, which translates into a run rate of $50 billion annually, the ipad could become a substantial portion of the company's business.

There is no doubt that Apple loyalists will jump to buy this device at their first opportunity. But the large scale success will lie in the millions of consumers in the middle who will buy the ipad in addition to and not in lieu of an iphone or a Mac.

And not only that, this device will spur simultaneous revenue streams for ipad applications and wireless WiFi companies, not to mention cool ipad games.

So there's money to be made of this in billions, and perhaps one clear way to play this game is to buy Apple stock and let that enjoy all the upside potential.

Scammers Attack PricewaterhouseCoopers and Deloitte

It appears that scam artists have latched on to Big Four firms.

At this time, we see that PricewaterhouseCoopers and Deloitte are the victims of two publicly known attacks.

On their website, PricewaterhouseCoopers reports a scam where folks got bogus checks dated December 21, 2009 embossed with the PwC logo with a letter which advises “the recipients that they had been selected to be "secret shoppers." The letters guided the potential scam victims to cash the checks at specific banks, then wire the funds to another address for use by a second "secret shopper."

PwC is now working with law enforcement agencies and the Postal Service to close out this illegal effort. PwC wants anyone who has received one of the solicitations to contact Doug Smith, Postal Inspector at (813) 281-5228, or fax a check copy and instructions to 813-375-8047. The firm has put all its people on notice, in case they see or hear anything.

"Since the first batch of checks went out in December, we suspect those recipients have either reported the issue or thrown out the materials," said Rose Littlejohn head of PwC US Security. "But right now there is nothing to prevent the scammers from making another attempt"

So, beware of any checks that sound too good to be true or ask you to do something that doesn’t feel quite right, despite looking quite legitimate. Though we don’t have direct knowledge of anyone affected, its possible enough numbers have received this check to have made it to PwC’s website.

The situation is quite different with Deloitte, which has been the victim of another hoax. The Charleston, West Virginia observer reports that Robert M. "Robe" Otiso, 36, of Elk River, MN was arrested in November 2009 and charged with mail fraud, wire fraud and conspiracy to launder money. Prosecutors believe that Otiso and his alleged co-conspirators in the U.S. and in Kenya tricked state governments into diverting large payments into accounts bearing names that closely resembled those of actual vendors.

In December 2009, the paper reports that Angela Chegge-Kraszeski, a Kenyan woman living in North Carolina, admitted that she followed instructions e-mailed from Kenya to incorporate companies such as "Deloite" Consulting Corp. and "Unisyss" Corp., deliberate misspellings of real companies Deloitte Consulting LLC and Unisys Corp. She then mailed forms that instructed state governments to direct payments to the fake firms instead of the real ones, she said. Money from those accounts was later wired to Kenya.

According to the November indictment, before officials caught on, the scheme netted $919,916 from West Virginia, with an additional $1,288,037 stolen from Massachusetts, $869,546 from Kansas and $301,571 from Ohio.

Nothing of this has made it to the Deloitte website yet, as the firm is an indirect victim, along with other well known companies, of a well orchestrated effort, causing the matter to be under the purview of US law agencies. As with PwC, we hope there is a quick indictment of the true perpetrators of this scam.

Read the full article here....

Theft and misuse of logos, well-known names and top reputations is likely more prevalent now in this internet age. Folks that have received the “You are the sole recipient of $64 million” know enough to delete, but as crooks get more sophisticated, they are now getting to catch unsuspecting people in newer ways. It pays to be careful, and as the old adage goes, Caveat Emptor.

If you are aware of such checks or any new developments on the Deloitte case, do comment.

Deloitte Is Top Hedge Fund Service Provider Of Big Four Firms

We see from a recent press release that Deloitte was selected as the top Big Four accounting firm service provider by hedge funds with $1 billion or more in assets, ranking second overall, in the Institutional Investor 2009 Alpha Awards. Deloitte has now ranked first among the Big Four in five consecutive years.

Deloitte was ranked first overall for client satisfaction for audit, hedge fund expertise, and regulatory and compliance by hedge funds with $1 billion or more in assets. The 2009 Alpha Awards surveyed more than 650 hedge fund firms, which collectively manage more than $1.1 trillion in assets.
 
When you think of financial services audit, its typically KPMG which comes to mind as the leading auditor for banks, financial institutions, mutual funds, and insurance companies. So Deloitte's ranking as the top auditor for hedge funds and its retention of the number one spot for five years calls upon traditional thinking of which firm is in top of mind while thinking of specific industries. Is KPMG losing steam not only on hedge funds, but also in other sub-sectors of the financial services industry? Also, does other rules of thumb hold, such as Ernst & Young for upcoming technology start ups?
 
If our readers have any thoughts on this, we look forward to your comments.

Deloitte, Ernst and Young, KPMG and PricewaterhouseCoopers At Davos 2010

 

 

 

The World Economic Forum starts tomorrow Wednesday January 27, 2010 for four jam-packed days of the world’s most powerful and influential leaders from industry, government, academia and non-profit organizations. The sessions cover an extraordinary variety of interesting topics and bring together the planet’s best minds to discuss, debate, validate and set forth actions to improve human life and sensibility.

 

The organizing theme for this 40th World Economic Forum Annual Meeting in 2010 is a call to action, "Improve the State of the World: Rethink, Redesign, Rebuild", with a focus on six thematic pillars:

 

1. How to Strengthen Economic and Social Welfare
2. How to Mitigate Global Risks and Address Systemic Failures
3. How to Ensure Sustainability
4. How to Enhance Security
5. How to Create a Values Framework
6. How to Build Effective Institutions

 

Here is just a brief list of what we believe are the most interesting sessions:

 

27.01.2010 What Is the "New Normal" for Global Growth?
27.01.2010 The Growing Influence of Social Networks
27.01.2010 Skills Creation: The Future of Employment
27.01.2010 The Next Global Crisis
27.01.2010 Management Innovations from the Fringe
27.01.2010 Rethinking Values in the Post-Crisis World
27.01.2010 Trouble with Bubbles
27.01.2010 Who Is the New Consumer?
27.01.2010 Design for Sustainability
27.01.2010 Rethinking Population Growth
27.01.2010 The Art and Science of Imagination
27.01.2010 The Economics of Happiness
27.01.2010 Reading Leaders' Minds
27.01.2010 The Rise of Asia
27.01.2010 What Is Life?
28.01.2010 Values in Your Everyday Life
28.01.2010 Overcrowded World
28.01.2010 Rethinking Humanitarian Assistance
28.01.2010 Global Energy Outlook
28.01.2010 Next Generation Materials
28.01.2010 The Information Age and Human Behaviour I
28.01.2010 Rebuilding Long-term Economic Growth
28.01.2010 Will India Meet Global Expectations?
28.01.2010 Strengthening the Rule of Law
28.01.2010 Rebuilding Fragile States
28.01.2010 Managing the Global Commons
28.01.2010 Enrichment through Music
28.01.2010 Does an Algorithm Run Your Life?
28.01.2010 Towards Low-Carbon Prosperity
28.01.2010 Constructing the Ephemeral: Light in the Public Realm
28.01.2010 Rethinking Market Capitalism
28.01.2010 A Future by Design?
28.01.2010 Right and Wrong: What Science Tells Us
29.01.2010 Nuclear Non-Proliferation: Getting to Zero
29.01.2010 Creating Jobs and Strengthening Social Welfare
29.01.2010 Personalized Medicine
29.01.2010 Achieving Social Goals: The Power of Behavioural Science
29.01.2010 Rethinking the Economic and Social Impact of Fitness
29.01.2010 Brazil: What Is Next?
29.01.2010 A Global Solution to Illicit Trade?
29.01.2010 From Brain Drain to Brain Circulation?
29.01.2010 Beautiful Science
29.01.2010 Prepared for a Pandemic?
29.01.2010 Saving Art through Science
29.01.2010 Does Religion's Claim to Truth Lead to Violence?
29.01.2010 Europe's Role on the Global Stage
29.01.2010 The Nature of Intelligence
29.01.2010 Entrepreneurship: The Key to Sustainable Growth
30.01.2010 Towards an East Asian Community?
30.01.2010 Discover a Hacker's Mindset
30.01.2010 Facing a Sea Change
30.01.2010 Redesigning Financial Regulation
30.01.2010 A World without Nuclear Weapons: Utopia?

 

The complete list is at
The Complete Davos 2010 Session List

 

For the inquiring mind, this is a delectable menu of topics with each vying for the other for attention. Sadly, even the delegates have to consciously choose their best set of simultaneous sessions, and of course leave enough time for very high-powered networking and interviews.

 

The Big Four firms are also represented at Davos 2010, and below are the key programs in which the CEOs from Deloitte, Ernst and Young, KPMG and PricewaterhouseCoopers will participate. Interestingly, we had to pull this from the WEF website, and could find hardly a mention of this on the firm’s websites, contrary to prior years when a press release would proudly proclaim their participation. Are the Big Four firms keeping a low profile this year? We wonder why?

 

• Dennis Nally, Chairman, PricewaterhouseCoopers International, PricewaterhouseCoopers, USA is on the panel on rethinking the "new normal" for key economies going forward.
• James H. Quigley, Global Chief Executive Officer, Deloitte, USA moderates a panel, which asks “What values need rethinking in the wake of the "Great Recession"?
• James S. Turley, Chairman and Chief Executive Officer, Ernst & Young, USA discusses global employment by looking at human capital imbalances for a sustainable post-crisis recovery
• Timothy P. Flynn, Chairman, KPMG International, USA in on the panel which inquires how business leaders can rebuild trust among their stakeholders

 

The participation of these firms and the choice of topics seem quite appropriate, they are engaged in serious debates on business values, employment, stakeholders and global growth.

 

 

 

What Is the "New Normal" for Global Growth?

Date: 27.01.2010
Time: 08:45-10:00
Location: Sanada 1+ 2, Congress Centre
Despite an upward revision of the International Monetary Fund's most recent World Economic Outlook, average real GDP growth of the global economy over the next five years is expected to be less than that of the five years (2003-2007) before the crisis.

 

In partnership with Time magazine, industry leaders, economists and policy-makers rethink the "new normal" for key economies going forward.

 

Simultaneous interpretation in German

 

This session is open to the reporting press.

 

Moderated by
Michael J. Elliott ** Editor, Time International, Time Magazine, USA
Panellists

Dennis Nally ** Chairman, PricewaterhouseCoopers International, PricewaterhouseCoopers, USA
Arif M. Naqvi ** Founder and Group Chief Executive Officer, Abraaj Capital, United Arab Emirates; Co-Chair of the Governors Meeting for Investors 2010
Raghuram G. Rajan ** Eric J. Gleacher Distinguished Service Professor of Finance, University of Chicago Booth School of Business, USA
Nouriel Roubini ** Chairman, Roubini Global Economics Monitor, USA
David M. Rubenstein ** Co-Founder and Managing Director, Carlyle Group, USA
Heizo Takenaka ** Director, Global Security Research Institute, Keio University, Japan; Member of the Foundation Board of the World Economic Forum
** confirmed for this session

 

Rethinking Values in the Post Crisis World

Date: 27.01.2010

Time: 10:45-12:00
Location: Congress Hall, Congress Centre
Values are considered important and enduring principles, which are correct and desirable in life, shared by members of a community.

 

What values need rethinking in the wake of the "Great Recession"?

 

This session is open to the reporting press.

 

Moderated by

James H. Quigley ** Global Chief Executive Officer, Deloitte, USA
Panellists
Yvan Allaire ** Chair of the Board of Directors, Institute for Governance of Public and Private Organizations (IGOPP), Canada
Thomas H. Glocer ** Chief Executive Officer, Thomson Reuters, USA
Yasuchika Hasegawa ** President and Chief Executive Officer, Takeda Pharmaceutical Company, Japan
Hartmut Ostrowski ** Chairman and Chief Executive Officer, Bertelsmann, Germany
Jim Wallis ** Editor-in-Chief and Chief Executive Officer, Sojourners, USA
Muhammad Yunus ** Managing Director, Grameen Bank, Bangladesh
** confirmed for this session

 

 

Skills Creation: The Future of Employment 

Date: 27.01.2010
Time: 09:00-10:15
Location: Aspen 1, Congress Centre
Although unemployment rates continue to rise, there are still 2.6 million jobs unfilled in the US and 4 million in Europe because of a shortage of skilled workers.

 

What imbalances in terms of human capital should be addressed for a sustainable post-crisis recovery?

 

This session will be webcast and on the record.

 

Moderated by
J. Frank Brown ** Dean, INSEAD, France
Panellists
Kris Gopalakrishnan ** Chief Executive Officer and Managing Director, Infosys Technologies, India
Jeffrey Joerres ** Chairman and Chief Executive Officer, Manpower Inc., USA
Wallace King ** Chief Executive Officer, Leighton Holdings, Australia
Fred van Leeuwen ** General Secretary, Education International, Belgium
Lubna S. Olayan ** Deputy Chairperson and Chief Executive Officer, Olayan Financing Company, Saudi Arabia; Chair, Arab Business Council, World Economic Forum

James S. Turley ** Chairman and Chief Executive Officer, Ernst & Young, USA
** confirmed for this session

 

Rebuilding Trust in Business Leadership

 

Date: 28.01.2010
Time: 09:00-10:00
Location: Congress Hall, Congress Centre
A global survey in 2009 revealed that only 29% of respondents trust information communicated by CEOs, down from 36% in 2008.

 

What steps should business leaders take to rebuild trust among their stakeholders?

 

This session is open to the reporting press.

 

Moderated by
Richard W. Edelman ** President and Chief Executive Officer, Edelman, USA
Panellists
Eckhard Cordes ** Chairman of the Management Board and Chief Executive Officer, METRO, Germany

Timothy P. Flynn ** Chairman, KPMG International, USA
John Monks ** General Secretary, European Trade Union Confederation (ETUC), Brussels
Ferit F. Sahenk ** Chairman, Dogus Group, Turkey
Ruben K. Vardanian ** Chairman of the Board and Chief Executive Officer, Troika Dialog Group, Russian Federation
** confirmed for this session

 

 

All Big Four Firms Are Best Companies To Work For In 2009

All the Big Four firms recently made Fortune’s 2009 “100 Best Companies to Work For” list, though not at the very top as we have become very accustomed to seeing in BusinessWeek or Diversity or Working Mothers magazine. Nonetheless a very creditable performance against a tough crowd of equally impressive and quality peers. 2009 sported tougher competition as three of the five firms dropped rank from the 2008 listing.

In addition, we are seeing a varied picture with firms actively cutting positions to some minor increases at Deloitte and PwC from 2008 to 2009, in line with the general decrease in business for these firms in the Americas.

Check out our January 2009 blog post on the 2008 rankings


However, tough external conditions appear to have created some welcome bonuses for employees, either through additional holidays, a sabbatical program or less travel.

Fortune has a rigorous process to select these top companies, and with a large chunk of the selection process based on true employee responses, its hard to game this list, so makes the results reliable. It conducts the most extensive employee survey in corporate America with 347 companies in the overall pool. Two-thirds of a company's score is based on the results of survey sent to a random sample of employees from each company with questions on attitudes management's credibility, job satisfaction, and camaraderie. The other third of the scoring is based on the company's responses on pay and benefit programs, hiring, communication, and diversity.

Ernst and Young was the first to rank among the firms at #44 for 2009, moving up 7 ranks from #51 in 2008. E&Y has 24,815 US employees, down 4% from 2008, and Fortune commented that “E&Y offers a traditional pension in addition to a 401(k). The firm is courting alumni via a new magazine, Connect.”

Deloitte follows Ernst and Young with #70 rank in 2009, but down 9 ranks from # 61 in 2008. Deloitte had 39,065 US employees and actually increased its staff count by 1%, as we have said earlier, Deloitte seems to be the most resilient among Big Four firms to the global slowdown. Fortune says, “Firm has invested $300 million in Deloitte University, a 107-acre campus in Texas that opens in 2011 and will be the "symbolic heart" of their organization.”

PricewaterhouseCoopers is just behind Deloitte at #71 for 2009, falling 13 ranks from #58 in 2008. PwC also increased its ranks by 1% in the US and had 29,387 US employees in 2009. Fortune did pick up on this employee level increase and the minor bonus in terms of holidays, stating, “Accounting firm had minor layoffs (less than 1% of the staff), canceled 2008 year-end holiday parties, and gave two extra paid holidays to employees.”

Accenture who had just made the list in 2008 with a #97 rank moved up smartly by 13 ranks to #84 for 2009. Accenture was quite tough in letting people go in the US, dropping headcount by 7% to 30,000 US employees. According to Fortune, “Management consultant adopted new Smart Work program to cut down on time employees spend at client sites; 36 offices have videoconferencing facilities.”

KPMG was the final firm to make the list this year at #88 in 2009, dropping a whopping 32 ranks from a creditable #56 in 2008. KPMG also slashed employees, and as our previous performance analysis shows, had the largest drop in revenue among Big Four firms, KPMG had 20,972 US employees in 2009, down 7%. On the bright side though, Fortune reported that, “Audit firm introduced a sabbatical program allowing employees to take leaves of four to 12 weeks at 20% of pay. Some 450 employees immediately signed up for it. Employees average 25 paid days off.”

PricewaterhouseCooopers Gains Top Rating From Gartner

We see from a recent press release that PricewaterhouseCoopers has received a “Strong Positive” rating in Gartner’s Global Finance Management Consulting Services MarketScope Report, which was published recently on December 21, 2009.

This is the highest possible rating in the Marketscope, a "Strong Positive" shows a provider who can be considered "a strong choice for strategic investments" where customers can continue with planned investments and potential customers can consider this vendor a strong choice for strategic investments.. The research assesses the global capabilities of nine leading finance management consulting service providers on customer experience, market understanding, market responsiveness, product/service, offering strategy, geographical capabilities and vertical-industry strategy.

Congratulations to PwC for this select honor.

Unfortunately, there is a stiff price to see the contents of this report (US$1,995), so we can’t say who the other 8 providers are, but very likely some of the Big Four firms would be on that list, and somewhat curious why PwC should feature this as a big release on their global website, but other firms are quite silent on this point.

Accenture’s Animal Ads: Can Dancing Elephants and Jumping Frogs Help?

About four weeks ago, on Sunday December 13th, 2009, Accenture ended its six-year sponsorship of Tiger Woods. We had blogged extensively on this topic:

On December 9th, we argued that Accenture should not continue sponsorship on moral grounds and should be the first to drop sponsorship
Read the blog post here.

On December 12th, we were among the first to notice that Tiger was being proactively phased out of Accenture’s advertisements and home page
Read the post here.

On December 13th, we agreed with Accenture’s decision to discontinue. In addition, 70% of respondents on The Big Four Poll agreed with this decision.
Read what we said then.



Today, January 14, 2010, we are seeing the new version of Accenture’s ads on the home page, and according to the WSJ, these will be further blasted to the internet, 69 airports, TV, posters and print media. Recently, Accenture has been aggressively removing all traces of its association with Tiger Woods, and will equally assertively move ahead with these images to blanket media all over the world.

The Wall Street Journal reports that this was chosen after four weeks of extensive testing with focus groups and development work, and will in a subliminal sense continue the erstwhile Accenture tag line: "High Performance. Delivered." It appears that Young & Rubicam, Accenture's ad agency, provided some ideas, of which the animal ads were the top performer, besting jugglers and jump-ropers. Accenture plans to spend $40 to $50 million dollars on this advertising, after spending nearly $300 million over a six year period with Tiger Woods.

The advertisements we are seeing today on the home page are as below:

A school of fish in a shark formation – Is your business in shape to compete?
A baby elephant walks over a thin log over a chasm – You’re never too big to be nimble
A chameleon puts out tongue in a flower formation – If you innovate, they will come
A frog jumps over three frogs – Play quantum leapfrog
A baby elephant on a small surfboard – Who says you can’t be big and nimble?

Of course, prior to the scandal, before Thanksgiving 2009, Tiger did epitomize high performance on the golf course, his game was amazing, his shots were breathtaking, his confidence was powerful, and the drama in major tournaments was heightened severalfold when he played. On a technical level, Tiger Woods was the best player the game had seen for a very long time. Association with this athlete served Accenture well, he was forever aiming for greater heights and Accenture rode that up, with some memorable one-liners that demonstrated its own consulting and outsourcing capabilities.

The risks of association with one individual became very apparent as events unfolded with rapidity last November and December, revealing a less than spotless Tiger. We argued that Accenture should discontinue sponsorship on moral grounds, to show an example to its clients and its employees. With Tiger’s own press release on his indefinite withdrawal from golf, this decision became a lot easier, and Accenture was the first major sponsor to pull out on late Sunday December 13th, 2009 (our blog was first, prescient and somewhat influential we would believe!). At that time, it promised to come out with another equally engaging marketing campaign.

And so it seems that a carnivorous tiger has given way to other less ravenous animals and reptiles. The two obvious advantages of this campaign are that Accenture will no longer need to pay a real human being millions of dollars to show their faces on ads, and its unlikely that friendly animation animals will get themselves into scandals or irk the SPCA.

More importantly, we ask if this satisfies the key rule of advertising – will it sell product?

Investors certainly don’t seem to care, Accenture’s stock is close to its all-time highs (NYSE:$ACN $43.16), and the stock is even higher today that it was when the scandal broke in mid December (NYSE:$ACN $41.96). And the stock is up 0.87% today, after this announcement too.

It does not seem to affect existing clients and the backlog either, both were impacted by larger scale macroeconomic factors than any advertising campaign, as was very evident from the Q1-2010 earnings release.

So it boils down to how current clients and any new future clients will change their attitude towards Accenture based on these animal representations. Will CEOs, CFOs and CXOs of large multinationals (Accenture’s target clients) be more inclined to provide Accenture business or call them in for RFPs after seeing dancing elephants and leaping frogs. One quick place to look – if there is a dramatic increase in new consulting and outsourcing bookings for the forthcoming quarter. If that doesn’t go up, then these animals will have had no apparent impact on sales either, at least in the short term.

Business apart though, stepping back and staring at these ads, there is a strange cheesy look and a hokey feel that seems to be out of sync with a $23 billion multinational corporation. But recall what the gecko did for Geico or the dog for Met Life or what the duck is doing for Aflac – it made unknown large conglomerates into companies that the common man can relate to. Animals can have a strange way of reaching the human subconscious than any hard hitting logos, facts or golf shots. So, we are not going to bet against cute animals and smart ad men!

So over the long-term, there perhaps is some level of hidden genius here. And if played right, this could propel Accenture from a behind-the-scenes consulting firm into a popular company that everyone knows about. So while they may not help make the next sale, the underlying positive enduring impact can be potentially large.

If Accenture can insert a talking elephant or a cheeky chameleon into humorous commercials, then everyone can know about Accenture, and not just through Tiger Woods. Recall that people weren’t too thrilled about the Accenture name either, and now it rolls off everyone’s tongue, so Accenture knows a thing or two about continuous and ubiquitous advertising.

We know that if shown enough times, ads become proxy for the truth, our expectation is that in January 2011, you would be hard pressed to recall Accenture ads without these animals!

Meanwhile, as they’re staying around for a while, we’ll just get used to these animated animals and their wise tag lines.

Auditor Merry Go Round at Overstock.com

We were intrigued by a recent quote from Overstock.com's President.

On December 29, 2009,we saw, "It is nice to be back with a Big Four accounting firm," said Jonathan Johnson, President of Overstock.com. "We are pleased to have the resources and professionalism that KPMG brings as our auditors. We will work closely with them to timely file our 2009 Form 10-K. In the meantime, we remain in discussions with the SEC to answer the staff's questions on the accounting matters that lead to our filing an unreviewed Form 10-Q for Q3."

As we dug further into this, we found an interesting situation between client and auditors; and between the opinions of two different auditors, as you'll see below.

And what makes it curioser is that Overstock.com has engaged three separate auditors in a space of just nine months.

From 2001 to 2008, PricewaterhouseCoopers were the statutory auditors to Overstock.com, but this changed when the company decided to engage a replacement through a RFP process, and Grant Thornton was selected in March 2009. Subsequently, Overstock.com received a letter from the SEC in October 2009 questioning the accounting for a "fulfillment partner overpayment" (which Overstock.com recovered and recognized $785,000 as income in 2009 as it was received). Apparently earlier PricewaterhouseCoopers had determined that this amount should not be recognized in fiscal year 2008, but in 2009. However, the new auditor, Grant Thornton after further investigation on the receipt of the SEC note, determined that the amount should have been booked in 2008 and not in 2009, and that Overstock.com should restate its 2008 financials to reflect this as an asset

This put Overstock.com in a difficult spot, with a severe disagreement between two audit opinions. In the appropriate words of Patrick Byrne, the company's Chairman and CEO, "Thus, we are in a quandary: one auditing firm won't sign-off on our Q3 Form 10-Q unless we restate our 2008 Form 10-K, while our previous auditing firm believes that it is not proper to restate our 2008 Form 10-K. Unfortunately, Grant Thornton's decision-making could not have been more ill-timed as we ran into SEC filing deadlines."

In general, Overstock.com agreed with PwC's recommendation not to account for the amount in 2008 and not with Grant Thornton's opinion of booking it in 2008.

While all this was going on, Overstock.com had a make a choice on its Q3-2009 quarterly financials, which they proceeded to file without required review by an auditor (in violation of SAS 100). This unusual filing brought on a censure by NASDAQ, who then finally agreed to grant the company time till May 2010 to refile the earnings.

Meanwhile, Grant Thornton wrote separately to the SEC outlining its position, and Overstock.com responded to GT's points in a letter from the President directly to the shareholders.

Eventually, in November 2009, Overstock.com dismissed Grant Thornton as its auditor, and Grant Thornton immediately severed its relationship with the company through a letter to the SEC.

After a search, on December 29, 2009, Overstock.com finally hired KPMG to review all its financials, accounting procedures and determine the final disposition of the timing for accounting of this issue.

Other bloggers with more knowledge of the stock and history, are taking a more aggressive position on Overstock.com's actions, here's a recent post from SeekingAlpha.com:

http://seekingalpha.com/article/180743-overstock-s-latest-accounting-and-disclosure-inconsistencies?source=yahoo

All this switching around of auditors in such a short space of time does call into question the company's stance on alignment with external auditors opinions. Typically, public companies do try to stay with one acccounting firm over a long period of time and iron out any differences at a professional level. This kind of merry-go-rounding seems to suggest that Overstock.com is looking for the auditor who will agree with the company's stance rather than an independent third party who will provide an honest perspective in the best interest of investors, whose interests they do represent as their fiduciary responsibility.

And that's where it apppears to stand today, with KPMG having the unenviable task of sorting through all this confusion, settling issues with the SEC and the NASDAQ, and putting Overstock.com back in compliance and in some sense of settlement with previous auditors. GT and PwC seem to have washed their hands off this, but that's not to say, that a shareholder lawsuit may spring from the blue, as we have seen in many cases, that such messy audits have the potential for long tail litigations.

Meanwhile, on the stock market, Overstock.com ($OSTK)hit a high of $17.65 on October 20, 2009 and then has been steadily drifting downwards to $13.24 per share today. At 22.84 million shares outstanding, this is a loss of market capitalization of $110 million. Other online retailers have had generally better stock performance during this period, so clearly the accounting issue is having some level of overhang on stock performance.

In another very interesting use of philosophy from the Chairman's letter:

"All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth."
- Friedrich Nietzsche

And we hope that in due course, we find the real truth, and not the interpretation that is biased towards the powerful.

Now, none of this would be apparent to the average online shopper who is seeking a real retail bargain on the "O, O, O, The Big Big O, Overstock.com", but there is always more to be had beyond the skin than is evident on the surface.

Clearly, this is not going away soon, and more news is sure to emerge as the company files its audited financials, and we'll blog as we hear of developments.

THE 2009 BIG FOUR FIRMS PERFORMANCE ANALYSIS

THE 2009 BIG FOUR FIRMS PERFORMANCE ANALYSIS

DOWNLOAD THE FULL STUDY HERE



An Analysis Of The 2009 Financial Performance Of The World’s Largest Accounting Firms

By Big4.com

January 2010

THE 2009 BIG FOUR FIRMS PERFORMANCE ANALYSIS
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EXECUTIVE SUMMARY

2009 was a difficult year overall for the Big Four accounting firms: Deloitte, Ernst & Young (E&Y), KPMG and PricewaterhouseCoopers (PwC), as their financial performance was affected by tough external conditions, slow global economic growth, cost-conscious clients and sluggish merger and acquisition activity.

After an extraordinary period of continuous revenue growth from the early 2000s to 2008, combined revenue for the four firms in fiscal 2009 did fall by 7% from fiscal 2008 in US dollar terms. Revenue decreases in US dollar percentage terms ranged from negative 5% for Deloitte to negative 7% each for Ernst & Young and PricewaterhouseCoopers to negative 11% for KPMG.

The large fall in US dollar terms was also driven by the appreciating US dollar during the period. Despite this, the combined revenues of the Big Four firms was an astonishing $94 billion, with PwC retaining its leadership position as the largest accounting firm on the planet by narrowly beating Deloitte.

The Americas region represents about 40% of global revenues for the Big Four firms, but its share has been falling over the years, due to the preponderance of mature markets. Contrary perhaps to common belief, Europe, Middle East and Africa has the highest percentage of total revenues for the Big Four firms at 45%. Asia Pacific, while being the smallest region at 15% of revenues, has posted the highest growth rates, owing to the strong upswing in many emerging Asian economies.

The Audit service line accounts for almost 50% of total revenues and has been generally holding at this level across the years. Tax services experienced strong growth in 2006 to 2008, in sync with global merger and acquisition transactions activity. Advisory services has been the fastest growing service line as the firms extend their services into risk management and business consulting.

The Big Four firms cumulatively employ more than 600,000 professionals globally, with a total of 34,000 partners overseeing a steep pyramid of about 470,000 professionals.

Despite the world’s worst financial crisis for over 70 years, the Big Four firms turned in quite a creditable performance, with revenues falling only by a small percentage in local currency terms. For 2010 and beyond, we will likely see a return back to revenue growth, though it is debatable whether a string of double-digit growth over multiple years will be seen for the next few years. 2010 will also be an interesting year to watch for any changes in Big Four rankings, with a close race between Deloitte and PricewaterhouseCoopers for the leadership position.

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REVENUE PERFORMANCE

2009 Reverses Multi-year Revenue Growth Trend

2009 was a difficult year overall for the Big Four accounting firms: Deloitte, Ernst & Young (E&Y), KPMG and PricewaterhouseCoopers (PwC), as their financial performance was affected by tough external conditions, slow global economic growth, cost-conscious clients and sluggish merger and acquisition activity. After an extraordinary period of continuous revenue growth from the early 2000s to 2008, mostly at a double-digit percentage rate, combined revenue for the four firms in fiscal 2009 did fall by 7% from fiscal 2008 in US dollar terms.

Quite apart from operating considerations, the large fall in US dollar terms was also driven by the appreciating US dollar during the period. The decrease in local currency terms was at a much lower level, ranging from negative 3% to positive 1%.

Despite the decrease in revenues, these large accounting firms posted some big numbers in 2009, their combined revenues was an eye-popping $94 billion, dropping from an all-time record level of over a $100 billion in 2008. Revenue decreases in US dollar percentage terms also differed across firms, ranging from negative 5% for Deloitte to negative 7% each for Ernst & Young and PricewaterhouseCoopers to negative 11% for KPMG. In local currency terms, revenue decreases were more modest, from positive 1.0% for Deloitte, 0.2% for PricewaterhouseCoopers to negative 0.2% for Ernst & Young and negative 2.6% for KPMG.

The difference across firms was driven by the intrinsic nature of the firm itself and varying compositions of service lines and geographies and a small effect due to fiscal years which spanned different calendar months. Deloitte’s fiscal 2009 ended on May 31, 2009, E&Y and PwC’s fiscal 2009 ended on June 30, 2009 and KPMG was the last to close out the fiscal year on September 30, 2009. In 2009, this small difference in fiscal year-ends would have had a relatively higher impact, for example, KPMG’s fiscal year 2009 coincided exactly with meltdown in financial markets as Lehman Brother collapsed in September 2008. Other Big Four firms had three to five fewer months of this negative impact.

Fluctuations in the US dollar also contributed to the higher level of percentage drops. The US dollar appreciated strongly from mid-2008 to mid-2009 against a basket of foreign currencies, after staying weak in the prior twelve months. This had an unfavorable effect, as depreciating local currencies, where the firms earned revenue, were converted into US dollars, in which the firms reported their annual results. In general, decreases expressed in US dollar terms were about 7% lower than decreases expressed in local currency terms.

PricewaterhouseCoopers retained its first place as the largest accounting firm on the planet with revenues of $26.2 billion, narrowly beating Deloitte, a very close second with revenues of $26.1 billion. Ernst & Young took the third spot at $21.4 billion, and KPMG maintained its position as the smallest of the Big Four firms at $20.1 billion of revenues. Deloitte proved to the most resilient firm to the tough economy, with its revenue falling only 4.9% in US dollar terms, while close rival PricewaterhouseCoopers’ revenues decreased 7.1%. This enabled Deloitte to close the gap against PwC in 2008 to be at almost at par in 2009. In 2010, it will be interesting to see who will gain the leadership spot, as a relatively stronger performance by Deloitte could well edge it past PwC.

The Big Four firms have had an astonishing run up in total revenues over the last six years. In 2004, combined firm revenues were only $60 billion, but by 2008, this had moved up at a compounded annual growth rate of 14% to exceed $100 billion. Some of this gain was from the collapse of Andersen, as Andersen’s $10 billion or so of revenues in 2002 was generally redistributed over the remaining four firms. Beyond this, the global financial boom in the middle of the decade, combined with assertive penetration into emerging economies provided the engine for revenue increases.

This positive trend rapidly reversed in 2009, the first time in six years, as economies all over the world came to an abrupt halt in mid-2008, with many countries going into recessions, and ultimately affecting the seemingly unstoppable growth in Big Four firm revenues. Even with this drop in 2009, the six year compounded annual growth rate from 2004 to 2009 was 9%, a remarkable achievement, given that these multi-billion dollar enterprises had to grow their size by nearly 60% from a high starting point by either finding new revenue opportunities or penetrating current clients.

Despite being auditors for the world’s public companies who are required to report extensive details on their financials, the Big Four firms provide only very high level financial information with minimum commentary, with consequent impact on the depth of possible analysis in our study.

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2009 FIRM PERFORMANCE

We blogged on each firm’s 2009 financial performance as they sequentially reported on The Big Four Blog, and we encourage our readers to read those analyses to obtain a flavor of the timing and our immediate response.

Ernst & Young was the first to report its 2009 financials, and with Deloitte following (on a much delayed schedule) it became clear that the year was turning out to be quite challenging on the revenue line. PwC followed suit, showing flat revenue growth on a local currency basis. KPMG was the last to report in December 2009, and its revenues fell the most among all the four firms. Additional data points from the UK member firms, where the Big Four firms have to provide more detailed information, proved that the pressure on the top line was also leading to lower bottom lines and decreased profits per partner.

In 2009, while revenues fell drastically in developed markets, all firms generally noted that emerging markets were more resilient against slowdowns, and revenues rose in many developing countries. The appreciating US dollar caused the percentage drop in US dollars to exceed the more modest drops in local currency. In general the firms’ results met our expectations, though KPMG’s sharp fall was quite surprising. In addition, Ernst & Young changed their method of reporting in 2009, choosing to report combined, rather than consolidated revenues, which led to a lower level of reported revenues.

PricewaterhouseCoopers’s FY 2009 global revenues for the year ending June 30, 2009 was US$26.2 billion, a 7.1% decline from the US$28.2 billion in FY 2008 in US dollar terms. However, on local currency terms FY 2009 revenues were actually higher than FY 2008 by a modest 0.2%. This performance enabled PwC to remain the largest accounting firm on the planet.

In terms of service lines, Assurance grew 2.0% in local currency terms to $13.1 billion, but in terms of US dollars, revenues actually fell by 4.8% from $13.8 billion in 2008. PwC attributed this to market-leading strength of the business and its continued focus on improved customer service and very competitive pricing. Tax services fell by 0.3% in local currency terms to $6.9 billion, but fell 7.5% in US dollar terms from $7.5 billion in 2008. Tax was impacted by the worldwide decline in corporate deals and restructuring work. Advisory services fell by 2.9% in local currency terms to $6.1 billion, but fell 11.4% in US dollar terms from $6.9 billion in 2008. This service line was the hardest hit by the global slowdown, as M&A and IPOs dried up and private equity firms slowed, while bankruptcy and restructuring work provided some offset.

In terms of geographies, Asia revenues rose about 4% to $3.7 billion in local currency terms but falling about 5% in US dollar terms from $4.0 billion in 2008. Revenues in the smaller regions of Middle East & Africa (up 9.1%) and South & Central America (up 13.3%) also rose strongly in local currency terms, showing strong growth in emerging markets. In the developed world, revenues in both Europe and North America declined, and since these account for 85% of total PwC revenues, they essentially drove the results for the firm. Revenue growth was high in a number of PwC member firms around the world, with particularly good results in Japan, Russia, Spain, Sweden and Canada.


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Deloitte Touche Tohmatsu, the global firm, reported fiscal 2009 revenues for the year ending May 31, 2009 of US$26.1 billion, an increase in local currency terms of 1%, but a drop of 4.9% in US dollar terms from 2008.

By service line, Consulting (Advisory) was the fastest grower at 7.3% in local currency terms; and in US dollar terms, revenue increased 2% from $6.3 billion in 2008 to $6.5 billion in 2009. Audit was relatively flat against 2008 in local currency terms; in US dollar terms, Audit shrank by 6.4% from $12.7 billion to $11.9 billion. Tax was also relatively flat against 2008 in local currency terms; in US dollar terms, Tax revenues decreased by 5.5% from $6.0 billion to $5.7 billion. Financial Advisory Services revenue fell 6.1% in local currency terms, but in US dollar terms, fell by 13.8% from $2.4 billion in 2008 to $2.0 billion in 2009.

In terms of geography, Americas dropped 1.3% in local currency terms and 3.7% in US dollar terms from $12.9 billion in 2008 to $12.5 billion in 2009. Europe, Middle East and Africa rose 2% in local currency terms but dropped 9.0% in US dollar terms from $11.3 billion in 2008 to $10.2 billion in 2009. Asia Pacific grew 4.7% in US dollar terms from $3.2 billion in 2008 to $3.4 billion in 2009. The Asia Pacific region had local currency growth of 7.6% and was the fastest-growing region for the fifth consecutive year. India’s revenues grew 29.9%, Australia grew 11.5% and Japan grew 11.3% in local currency terms.

Africa, the Middle East, and Latin America and the Caribbean posted high growth rates of 21.3%, 15.6% and 13.7% respectively, in local currency.

Despite this remarkable performance, Deloitte was unable to beat PwC to be the largest Big Four firm in the world. Its 2009 revenues of $26.1 billion were behind PwC’s 2009 revenues of $26.2 billion by only $100 million or 0.4%. We had indicated in our earlier analysis that a 4.5% decrease in Deloitte’s revenues in US dollar terms would make it the largest among the Big Four firms. However, Deloitte’s overall revenues actually dropped by 4.9% from 2008 to 2009, narrowing, but not completely closing the gap against PwC. By showing remarkable performance in 2009, arguably one of the toughest environments in recent memory, Deloitte has shown that it is a strong contender for the leadership position.
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Ernst & Young’s combined worldwide 2009 revenues for the year ending 30 June 2009 were US$21.4 billion, decreasing a modest 0.2% in local currency terms from the comparable period in FY 2008 of US$23.0 billion in global revenues. In US dollar terms, the revenue actually declined 6.8% from 2008 to 2009.

Assurance Services with FY 2009 revenues of $10.1 billion offset price pressure with market-share gains, and revenues declined only 0.7% in local currency terms, but 6.3% in US dollar terms. Global Tax Services with FY 2009 revenues of $5.8 billion was up 1.8% in local currency terms due to increased tax enforcement, but dropped 5.2% in US dollar terms. Advisory Services with FY 2009 revenues of $3.6 billion was up 1.5% in local currency terms due to sustained demand for risk management and performance improvement, but dropped 6.0% from $3.8 billion in 2008 in US dollar terms.

Transaction Advisory Services with FY 2009 revenues of $1.9 billion, had a 6.9% decrease in local currency terms due to fall in M&A volumes, but revenues decreased a large 14.8% in US dollar terms from $2.2 billion in 2008.

Across E&Y’s five geographic areas, Japan grew at 7.5% in local currency terms, due to the acquisition of 1,000 professionals from accountancy firm Misuzu; and revenues increased 20% in US dollar terms. The Europe, Middle East, India and Africa (EMEIA) area grew 1.8% in local currency terms, but declined 9.7% in US dollar terms. Oceania decreased 0.4% in local currency terms, but declined a dramatic 15.9% in US dollar terms. The Far East decreased 2.7% in local currency terms and 5.9% in US dollar terms. The Americas area decreased 3.2% in local currency terms, but 5.5% in US dollar terms.

There were some bright spots however, with many of the emerging markets achieving strong revenue growth, including the Middle East at 18.6%, India at 13.1% and Brazil at 8.0%.

Ernst & Young made a key change to their reporting of revenues in 2009, electing to show combined, not consolidated revenues by eliminating intra-firm billings. E&Y restated its 2008 revenues down from $24.5 billion as originally reported to $23.0 billion reported as restated in 2009. The reason provided for this change was, “In line with our globalization efforts to harmonize policies across member firms, revenues for 2009 and 2008 related to member firm billings to other member firms have been eliminated from the financial information presented here. This financial information represents combined not consolidated revenues, and includes expenses billed to clients.”
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KPMG reported 2009 combined revenues for the fiscal year ending 30 September 2009 of US$20.1 billion versus US$22.7 billion for the prior 2008 fiscal year. This was an 11.4% decline in US dollars terms and a 2.6% decline in local currency terms, which was the highest drop among all Big Four firms.

By service line, Audit 2009 revenues were $10.0 billion versus $10.7 billion in 2008, down 6.9% in US dollar terms but a 0.5% increase in local currency terms. In the global financial services industry, Audit services' revenues actually grew 7%.

Tax services revenues in 2009 were $4.1 billion versus $4.7 billion in 2008, a 13.4% decrease in US dollar terms and a 4.3% decrease in local currency terms. But certain practices within Tax did very well: Transfer Pricing grew 5.3%, Indirect Tax grew 8% and International Executive Services grew 7.8%, all in local currency terms.

Advisory services revenues of $6.1 billion in 2009 decreased versus $7.3 billion in 2008, by a large 16.6% in US dollars terms and 6.6% decline in local currency terms. However, Advisory in China and the Middle East posted double-digit growth.

By geography, Americas Region had 2009 revenue of US$6.3 billion versus US$7.2 billion in 2008, decreasing 12% in US dollar terms and 8.6% in local currency terms. Bright spots included Brazil with 5% revenue growth, Mexico with 8.2% growth, Venezuela grew 22.9% and Chile's revenues rose 22.7%, all in local currency terms.

In Europe, Middle East and Africa, combined KPMG member firm 2009 revenues were $10.7 billion versus $12.4 billion in 2008, dropping 13.5% in U.S. dollars terms and 0.6% in local currency terms. Middle East and South Asia was the fastest growing sub-region in Europe; and KPMG in Africa had a 9.3% growth in local currency terms.

In Asia Pacific, combined 2009 revenues of $3.1 billion decreased 1.1% in US dollars terms but grew a substantial 3.9% in local currency terms. Some countries posted spectacular results: Korea had 19.4% growth, Vietnam and Cambodia each had 17.5% growth, and Japan had 7.2% growth, all in local currency terms. KPMG said that Asia Pacific member firms are beginning to see an increasing number of M&A transactions especially in China and Korea.

Revenues in the BRIC countries as a group grew 4.3%. Middle East and South Asia was the fastest growing practice with a 25% growth rate. KPMG’s BRIC headcount increased by 11.5% this year, with BRIC headcount nearly quadrupling in the past ten years.



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REVENUE BY GEOGRAPHY



The distribution of revenues by geography shows some very interesting insights. Contrary perhaps to common belief, Europe (including generally Europe, Middle East and Africa), rather than the Americas region (including Canada, the US and South America), has the highest percentage of total revenues for the Big Four firms, averaging 45% of total worldwide revenues. Americas average about 40% and the Asia Pacific countries (including India, South Asia, China, North Asia and Australia) have the remaining 15% of the revenue share.


The Americas

The Americas represent about 40% of global revenues, but its share has been falling over the years. From 2004 to 2009, there has been a noticeable drop of about 3% in the Americas region’s share of the total revenue for all the firms. In 2005, 43% of combined firm revenues were reported from the Americas region, whereas in 2009, it had dropped to only 40% of total firm revenues.

There also appears to be large variation across firms in the amount of revenue from this geographic region as a percentage of their global revenues. For example, Deloitte at the high end, sources 48% of its revenues from the Americas and KPMG at the low end has only 31% of its revenues from the Americas. Ernst & Young and PwC each have about 40% of their total revenues from the Americas, in line with the total firm average.

While Latin America, and particularly Brazil and Mexico have provided good growth opportunities for growth in recent years, the predominance of the mature markets of USA and Canada with slower growth has generally limited the expansion of Big Four firms in the Americas region. The 3% revenue share loss has generally gone to Asia Pacific, where emerging markets such as China, India, Korea and Vietnam have grown at disproportionately higher rates.

Europe

Europe, surprisingly, is the largest region by revenue for all Big Four firms. The Big Four firms typically combine Europe, comprising the developed countries of Western Europe, the up and coming markets of Eastern Europe with Middle Eastern and African nations for a giant EMEA region. Europe represents about 45% of global revenues, and as we see across the years, this total percentage has remained remarkably flat from 2004 to 2009. In 2004, 46% of combined firm revenues were reported from the Europe region, and in 2009, the same percentage 46% of total firm revenues came from Europe.

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As in Americas, each firm has a different percentage of European revenues as a share of the total revenues. KPMG at the high end sources 53% of its revenues from Europe (KPMG Europe being a key contributor) while Deloitte at the low end has only 40% of its revenues from Europe, this situation being a total polar opposite of the Americas. Ernst & Young and PwC each have 45% of their total revenues from Europe, in line with the total firm average.

This diverse European region comprises both of mature markets such as the United Kingdom, France, Italy and Germany, as well as fast growing Eastern European nations - Poland, Russia, Czech Republic, Hungary and Romania. The Big Four firms have had spectacular growth in Eastern Europe as these high growth economies have matured into capitalistic markets, requiring sophisticated audit, tax and transaction services.

The Big Four firms have had tremendous growth in Russia in particular as part of their BRIC initiatives. Europe also comprises the rapidly rising countries of the Middle East – including Dubai, Abu Dhabi, Kuwait, Saudi Arabia and Israel; as also the larger economies of the African continent – South Africa, Egypt and Nigeria for example. In the Middle East and Africa, the Big Four firms have capitalized on their historical small presence and posted very high annual growth numbers for the last few years, albeit from a smaller base.

Asia Pacific

Asia Pacific, while being the smallest region, has posted the highest growth rates of all regions. This diverse region comprises a few mature markets such as Japan and Australia, but mainly covers fast growth emerging markets such as China, India, Vietnam, Korea and Singapore. The Asia Pacific region has been in an economic boom for most of this decade, and their demand for Big Four firm professional services have multiplied. All the firms have grown at exceedingly high rates each year since 2004, with the result that combined revenues have doubled from $7 billion in 2004 to $14 billion in 2009.

Asia represents about 15% of global revenues for all the firms, and as we see across the years, this total percentage has increased steadily from 2004 to 2009. In 2004, 12% of combined firm revenues were reported from Asia, and in 2009, it had sharply increased to 15% of total firm revenues. This share gain came at the expense of the Americas region, which correspondingly lost its share of the pie.

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BRIC

The BRIC countries – Brazil, Russia, India and China – have been unquestionably the shining stars in the growth story in recent years. Though the firms do not report individual country revenues, there is typically some commentary on the annual report on the spectacular increases in these countries.

For example, Ernst & Young reported in 2009 that revenues in India had increased 13% and in Brazil by 8%; and KPMG said that their headcount in the BRIC countries had nearly quadrupled in the past ten years.

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REVENUE BY SERVICE LINE


The Big Four firms offer a wide variety of professional and financial services, with newer Advisory services adding to their more traditional and deep-rooted Audit (Assurance) and Tax Services. Firms vary in their structure and definition of these broad service lines, typically though about half the revenues are sourced from Audit, and the balance is shared between Tax and Advisory Services.


Audit

The audit service line, the largest in all firms, accounts for almost 50% of total revenues and generally holding this percentage level across the years. Typically Audit services is a steady business, as publicly traded clients renew auditor services each year with some increase in annual fees. Most companies prefer to maintain their auditors for a long time, providing stability to the auditors’ top line. The Audit service line experienced sharp growth in total revenues in 2005 to 2007, but this has slowed down sharply in the 2008-2009 years.

From 2008 to 2009, revenue for the Audit service line for the combined firms shrank by 6% in US dollar terms, which was better than the negative 7% in Tax service line and negative 9% in Advisory, which demonstrated the somewhat anti-recessionary nature of this service line. Audit fees came under pressure in 2009, but firms maintained their focus on client service and market share gains to mitigate any losses in revenue.

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Tax


The tax service line, forms about a quarter of the Big Four firm revenue and generally holding this percentage level across the years. Tax revenue are reasonably steady, as they derive revenue from add-on services provided to audit clients, in addition to tax services provided for transactions, complicated tax restructurings and other projects.

Tax had a very strong growth in 2006 to 2008, in line with large scale global merger and acquisition transactions activity, but had a sharp decline in 2009.

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Advisory

The Advisory service line, forms the last quarter of the Big Four firm revenue and includes the broader non-Audit and non-Tax services such as Transaction Advisory, Risk Management, and Business Consulting services; and demarcations generally vary across the firms. Owing to this catch-all nature of this category, there are many drivers of top line results, merger and acquisition activity being a principal factor.

Advisory services have been one of the fastest growers in the Big Four firms as the firms extend their services beyond assurance and taxation through penetration into current clients or through referrals from other firms who may be conflicted out at their clients. Advisory services have generally increased their share of revenues. In 2004, they had 22% of total revenues and this had sharply increased to 28% in 2009. Despite this sharp growth, Advisory services had the sharpest decline of 9% from 2008 to 2009, as clients slowed down transaction and restructuring activities all over the world.

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FIRM EMPLOYMENT ANALYSIS

The Big Four firms cumulatively employ more than 600,000 professionals all over the world, including partners, audit, tax and advisory professionals and administrative staff. This staggering number has been consistently on the rise since 2004, when cumulative employment was around 435,000 professionals.

Thus in six years, the number of people working at just these four firms has been around 175,000. Despite the reduction in revenues, net employment grew by more than 10,000 professionals from 2008 to 2009, with notably Deloitte and PwC adding to their workforce. The growth rate in employment of people dropped sharply to 2% in 2009.

Typical annual attrition rate at Big Four firms was running about 15% prior to 2008, so for example in 2008, the Big Four firms cumulatively would have made about 140,000 new hires to account for the loss of professionals and the additional growth. This works out to about 550 hires for each business day of the year.

Even in 2009, assuming attrition rates had dropped to 10%, new hires in 2009 would be about 70,000 equating to about 275 hires each day. Truly, Big Four firms are huge seekers of talent with correspondingly very busy recruiters even in a period of deep recession.

Elevation to partner at a Big Four firm is a tough and long process as every professional who has ever worked at one knows. Partners form an elite class within these large partnerships, and only one in about 20 people belongs to this exclusive club. In 2009, we estimate there were only about 34,000 partners in all the Big Four firms, overseeing a steep pyramid of about 470,000 professionals, thus the typical partner being responsible for about 14 professionals in 2009.

In 2004, the professional to partner ratio was only 11, thus partners are taking on more responsibilities in terms of professional management and development over the years.

Another metric that is closely watched is revenue per partner, in 2004, each partner was holding up $2.1 million in revenue, and this had crept up to $2.8 million by 2009, after peaking at $3.0 million in 2008. In other words, each partner was expected to bring in and manage client revenues of nearly $3 million in recent years to justify his or her position in the highest levels of the firms. Clearly, making partner is only the beginning of a series of demanding client development and professional responsibilities down the road.

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ERNST & YOUNG RESTATES REVENUE

Ernst & Young changed their revenue reporting methodology in 2009, by reporting “…combined not consolidated revenues, and including expenses billed to clients in line with globalization efforts to harmonize policies across member firms”. Under the prior consolidation method in 2008, Ernst & Young’s global revenues were $24.5 billion which were revised down to $23.0 billion under the new combined method of reporting. Ernst & Young restated only 2008 under this methodology but did not restate prior years, thus our analysis is affected by this reporting constraint.


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CONCLUSION

The 2007 to 2009 recession has been the world’s worst financial crisis for over 70 years, and despite such turbulence, the Big Four firms turned in quite a creditable performance, with revenues falling by single digits in local currency terms from 2008 to 2009. Since March 2009, global financial markets have seen a marked improvement in equity values, and general business conditions are decidedly in much better shape in December 2009 than earlier in the year.

Leading economic indicators in developed nations are on the uptrend and emerging market countries have posted multiple quarters of positive GDP growth. Clearly as we stand at the beginning of 2010, there is an optimistic outlook among leading executives, and all economies are decidedly on a growth pattern in the coming year. All these are positive indicators favor Big Four firm revenue growth, as the firms participate in an increasing level of financial activities pursued by their clients, whether it be tax restructuring or compliance, transfer pricing, mergers and acquisitions, strategic growth, risk management, IFRS conversions or audit compliance.

Having likely captured the worst of 2009’s impact in fiscal year 2009, we believe that fiscal year 2010, staring mid-2009 to mid-2010, will lead to positive revenue growth due to several key factors:

 An inherent improvement in underlying client fundamentals, with greater emphasis on implementing strategies their own top line growth

 Improved equity markets which are potentially poised to do better in 2010

 A low revenue base for easy comparison

 A depreciating US dollar, which has started sliding against major currencies in mid-2009

 More efficient Big Four firms, which have undergone internal restructurings and much better positioned to take advantage of growth prospects

 Higher penetration into emerging markets with better growth profiles

We think KPMG in particular will have the strongest fiscal 2010, since its fiscal 2009 ended in September 2009, and captured much of the crisis; and further its 2010 revenues will be compared to a much lower base.

The Big Four firms dominate their space and are unlikely to face any emerging competitors for a long time, and while regulation and audit litigation do pose operating and financial risks, it is unlikely that any of these single items will be of sufficient magnitude to generally upset the status quo.

For 2010 and beyond, we will likely see a return back to revenue growth, though it is debatable whether a string of double-digit growth over multiple years will be seen for the next few years. The Big Four firms have participated extensively in the explosive growth in the emerging markets, and further it will be harder to grow at high levels from an already huge revenue baseline, now exceeding $20 billion for each firm.

2010 will also be an interesting year to watch for any changes in Big Four rankings, with a close race between Deloitte and PricewaterhouseCoopers for the leadership position.



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About



Big4.com is an exclusive global social network for alumni and professionals of Accenture, Andersen, BearingPoint, Capgemini, Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers.



Notes



All figures are in United States dollars



Disclaimer



Source of figures for this analysis are publicly available financial statements and / or press releases issued by Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP on their website or on the internet

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Some numbers and ratios have been estimated due to non-availability of adequate information

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Totals may be affected by rounding





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Capgemini Employee Shareholding Plan A Success, Our Math Shows Why

In November 2009, we had reported on the our news feed on Capgemini’s effort to launch a shareholding plan for its employees, with a maximum of 6,000,000 shares reserved for their employees, opening on November 17, 2009 and settlement-delivery of these shares to occur on December 16, 2009.

Click here for our previously reported news item.

Capgemini now reports that this very first employee shareholding plan has been a success with 14,000 employees subscribing, after reductions, to over €165 million, corresponding to 6 million newly-issued shares, having reached the maximum number of shares offered.

These shares are issued at a price of €27.58, with dividends rights. With this dilution, the number of shares which comprise Capgemini’s share capital will be 153,958,441 on December 16, 2009.

Capgemini indicates that this effort, a sign of the confidence of employees in the firm’s future, now increases the employee ownership of Group capital to around 4% (6MM/150MM). Reportedly, employees subscribed in all 19 countries where the plan was offered, with the majority of subscribers come from France, US, the Netherlands, and the UK.

Let us do some math on this, given the scant information we have available.

From an employee’s perspective, we can presume a typical employee gets, assuming that 6,000,000 shares are equally distributed to each of the 14,000 subscribing employees (6,000,000/14,000), exactly 428.57 shares. And each employee has to put out Euro 11,820 (428.57 * Euro 27.58) to buy into this offer.

What do they get in return?

First there is the capital appreciation. The current price of Capgemini is Euro 31.05 per share on December 18, 2009, which is Euro 3.47 over the subscription price, leading to a current capital gain of Euro 1,487.14 per employee (428.57 shares * Euro 3.47). There is a restriction on when these shares can be sold, as there is a lockup period of 5 years. Now, we don't know what is likely to happen in 5 years, but we can safely say that we have passed through the worst recession of a generation, and stock prices, though not at March 2009 lows, are not that far off from six-year lows. It is very likely that Capgemini, whose performance has been affected, but not devastatingly so, will likely be around as a public company in 5 years, and shares will rise from this low level. Also assume that shares go up conservatively 6% each year (for 4 years) in line with operating performance, then in 5 years, the Euro 1,487.14 will rise to Euro 1,877.48 at a compounded rate.

Second, there is the dividend. Five years worth of dividends of Euro 1 per share is Euro 2,142.86 (Euro 428.47 * 1 * 5 = Euro 2,142.86)

That brings the grand total to Euro 4,020.34, and brings the pre-tax return on initial investment to 34.01% (Euro 4,020.34 / Euro 11,820). And that attractive rate of return is unlikely to be found anywhere today in capital markets!

Which speaks to why the offer was fully subscribed. While Capgemini employees may not all be financial analysts, they certainly have the made the right choice!

From the current shareholders perspective, there is some loss of value, which gets transferred from them to employees. This amount Euro 20.82 million (Euro 3.47 * 6,000,000 shares) is only 0.44% dilution (Euro 20.82 Million / Euro 4.78 Billion company market capitalization). But the advantage current shareholders get is that they rope in employees as fellow shareholders, and thus create incentives for employees to do their best for company performance and move the share price even higher.

From Capgemini’s perspective, this plan allows them to offer monetary value for employees, align employee interests with shareholder interests, and solidifies employee involvement for the longer term.

Theoretically then, this appears a win-win all around, as generally employee shareholder plans aim to do, notwithstanding unforeseen events or unpredictable conditions down the line, which could make this a total wash.

This is our outside-in analysis. If you’re a Capgemini employee and subscribed to this offer, let us know by comments how you thought about it, and what is the general mood of other employees who subscribed. And tell us if we got our math generally right…..

Big Ernst and Young Settlement on Bally Fitness, Large Implications

This is the leading item on the SEC.gov website today, with the SEC charging Ernst & Young LLP and 6 current and former partners for their roles in the accounting fraud at Bally Total Fitness Holding Corporation.

The SEC’s key finding: E&Y knew or should have known about Bally's fraudulent financial accounting and disclosures; and despite that, the firm issued unqualified audit opinions that Bally's 2001- 2003 financial statements were in line with US GAAP, and the audit itself was conducted in accordance with GAAS. The SEC indicates these opinions were “false and misleading”. The fraud accounting includes prematurely recognizing revenue and improperly deferring costs, which overstated income and inflated stockholders’ equity. The SEC claims that “E&Y did not express a qualified or adverse audit opinion, or refuse by disclaimer to express any opinion at all, but instead issued audit reports that contained unqualified opinions on Bally’s 2001-2003 financial statements.”, and this is indisputably incorrect.

E&Y, statutory auditor for Ballys has agreed to pay $8.5 million to settle the SEC's charges; and each of the E&Y partners also has settled the SEC's charges against them.

The SEC sounded an very alarming note of concern. According to Robert Khuzami, Director of the SEC's Division of Enforcement. "It is deeply disconcerting that partners, even at the highest levels of E&Y, failed to fulfill their basic obligations to the investing public by not conducting proper audits. This case is a sharp reminder to outside auditors that they must carry out their duties with due diligence. The $8.5 million settlement, one of the highest ever paid by an accounting firm, reflects the seriousness of their misconduct," said

"Ernst & Young and its partners on the Bally engagement violated their fundamental duty to function as public watchdogs, even after E&Y personnel identified Bally as one of the firm's riskiest audit clients," added Fredric D. Firestone, Associate Director in the Division of Enforcement.

The SEC also charged Bally's former CFO John W. Dwyer and former controller Theodore P. Noncek, who also agreed to settle the SEC's charges.

The SEC states that E&Y had already identified Bally as a risky audit because its managers were former E&Y audit partners who had "historically been aggressive in selecting accounting principles and determining estimates," and whose compensation plans placed "undue emphasis on reported earnings." Out of more than 10,000 audit clients in North America, E&Y identified Bally as one of E&Y's riskiest 18 accounts and as the riskiest account in the Lake Michigan Area.

The SEC indicates that the 3 E&Y partners knew or should have known that E&Y's unqualified audit opinions regarding certain Bally financial statements were materially false. In addition to agreeing to pay $8.5 million to settle the SEC's charges, E&Y agreed to undertake measures to correct policies and practices relating to its violations, and agreed to cease and desist from violations of the securities laws.

Ernst & Young issued a statement saying, "These settlements allow us and several of our partners to put this matter behind us and resolve issues that arose more than five years ago."

Wow!

There are so many critical points in this news release.

First, there is a lot of messiness in Bally itself. The company was charged with sales fraud by the NY State AG and the SEC launched an accounting investigation in 2004. The company went into bankruptcy in August 2007, emerged from bankruptcy in October 2007 100% owned by a hedge fund, Harbinger Capital and then refiled for bankruptcy in December 3, 2008. Note that the sales fraud (1999 - 2004) and the bankruptcy yo-yo (2007 – 2008) were unrelated to the accounting issues

Second, the SEC appears to be taking this very seriously. Note the inherently strong language in their statement and their comments. This is not your ordinary rap on the knuckles, and the amount fined “one of the highest ever paid by an accounting firm” shows that the SEC wants to showcase this particular situation as a warning to all other accounting firms:
“failed to fulfill their basic obligations”
“sharp reminder to outside auditors”
“seriousness of their misconduct”
“violated their fundamental duty to function as public watchdogs”

Third, the circumstances of E&Y’s involvement in Bally appear to be quite dubious. …”its managers were former E&Y audit partners who had "historically been aggressive in selecting accounting principles and determining estimates," and whose compensation plans placed "undue emphasis on reported earnings."”. Wait a minute, were Bally managers ex Ernst and Young partners? Which managers were they? – CEO, CFO, CAO, its not specified. Were they known to take aggressive positions within E&Y or after leaving? Were their compensation based on achieving certain EPS targets? And going around GAAP and getting the auditors’ consent a way to get more bonus? So many unanswered questions.

Fourth, “E&Y agreed to undertake measures to correct policies and practices relating to its violations, and agreed to cease and desist from violations of the securities laws.” This is a large commitment on the part of E&Y to make changes in their internal procedures, and also not to ever be afoul of securities laws. Look for some tough modifications on how audits are conducted by E&Y in the future with checks and counter checks to ensure that client financial statements are in conformance with GAAP and external audits are thorough, insightful and detailed to prevent sign-offs on any companies which do not comply. The SEC has specified 8 such actions that will be undertaken rather immediately by E&Y.

Finally, this is indeed a wake-up call for the Big Four firms and the accounting industry. The SEC is getting tough, and has demonstrated here that it will allow no breach of laws and investor protection, no matter how old the case and how messy the other circumstances are for the ultimate client.

This case points out the long-tail impact of a bad audit, in causing distress to accounting firms, many years after the audit has been completed. And we don't think this is the end of the affair, there are a lot of other pending accounting investigations with the SEC, Huron Consulting for example, and the outcomes for firms convicted of wrong doing are going to be high. The SEC is just emerging itself from getting a bad rap in the Madoff affair, so may be getting a little more aggressive and assertive than in previous years. Also investors would hope for drastic changes in the audit process of accounting firms, if the firms’ integrity as ultimate protectors of investors’ interests has to be fully and firmly re-established.

The Ernst and Young case is fully specified here: Click here to download full SEC case on E&Y

Accenture Q1-2010 Revenue Short But EPS Beats Street. Good Outlook

Accenture Q1-2010 Revenue Short, But EPS Beats Street. Good Outlook

Accenture (NYSE:ACN) just reported Q1-2010 results after market close today. The full earnings release is available on the Accenture.com investor relations site. We will only provide our quick analysis here at this time.

It was a mixed quarter for Accenture, they were a little behind Street expectations on the top line but beat consensus EPS by 2 cents. Consulting revenue fell 15 percent and outsourcing revenue dipped 4 percent. Wall Street is looking for revenue strength to see how the economic recovery is progressing, having argued that companies have done all they can on the cost side to be efficient and lean. Investors first reaction was to sell owing to the miss on the revenue side and the stock turned down 3% in after hours trading but recovered to near-flat towards the end of the conference call.

Accenture guided Q2-2010 to a lower number on the revenue side than the Street, but promised excellent performance in the second half of 2010. Full year outlook sales were higher than the street, indicating $6+ billion sales in both quarters of the second half. With a relatively deteriorating dollar compared to prior year, there is a foreign exchange tailwind for Accenture in the next few months, and the company even upped its FX effect by a positive 1%. FY 2010 EPS guidance spanned the consensus EPS of Wall Street, but it was better than their previous guidance.

Conditions are tough, and since January 2009 Accenture has been affected, much like every other company by the global slowdown. The prior Q1-2009 quarter was before this impact, so understandably both revenue and EPS were lower in this quarter. Given all this, the performance of the company has been quite creditable due to its global breadth, depth and diversity of business lines. Bookings in the quarter were $5+ indicating that the pipeline is being nourished decently, but outsourcing bookings actually fell more than consulting bookings.

Accenture has $4.0 billion in cash at November 30, 2009 even after distributing $500 million in dividends and continuing its stock purchase. There is little debt and the balance sheet is rock solid.

The ACN stock is trading near 52 week highs and close to its all time highs. The quarter was not blow out but the long term story is totally intact. This is a well run machine, and produces flat EPS in the very worst of times, a performance any portfolio today would love to have. As the global economy does turn around this year, Accenture is poised to benefit by helping clients both with Consulting and Outsourcing services.

Accenture plans to add 45,000 new professionals this year, adding to its 175,000 existing staff to exceed the 200K level shortly.

We have been long time admirers of the Accenture financial machine and its performance, strong cash position, efficient and competitive management, global scale, keen ambition and focus on operations which will prove to create shareholder value well into the future.

As we have seen in previous quarters, investors seem to reflect on performance during the night and the stock actually does well the next morning. We won't be surprised if all the analysts who attended the conference call think through what was said, and produce quite favorable notes, and ACN has a pretty good morning on the NYSE tomorrow. We'll keep you posted on Twitter. Follow us www.twitter.com/big4alum

Accenture, Q1-2010, Earnings, EPS, Revenue, Consulting, Outsourcing

KPMG 2009 Revenues of $20 B Drop 11%, Most Among Big Four Firms

KPMG just reported its 2009 combined revenues for the fiscal year ending 30 September 2009 of US$20.11 billion versus US$22.69 billion for the prior 2008 fiscal year. This was a 11.4% decline in U.S. dollars terms and a 2.6% decline in local currency terms.

From our previous blog posts, let’s look at the headline numbers for other Big4 firms:

“PricewaterhouseCoopers just released its FY 2009 global revenues for the year ending June 30, 2009, which came in at US$26.2 billion, a 7.1% decline from the US$28.2 billion in FY 2008 in US dollar terms. However, on local currency terms FY 2009 revenues were actually higher than FY 2008 by a modest 0.2%”

“Deloitte Touche Tohmatsu, the global firm, just came out with its fiscal 2009 revenues for the year ending May 31, 2009. 2009 full year global revenue was US$26.1 billion, an actual increase in local currency terms of 1%, but a drop of 4.9% in US dollar terms from 2008.”

“Ernst & Young just reported its combined worldwide results for the year ending 30 June 2009 (FY09), the first Big4 firm to report its global results. Combined global firm revenues of US$21.4 billion for the fiscal year ended 30 June 2009 (FY09) decreased a modest 0.2% in local currency terms from the comparable period in FY 2008. In FY 2008, E&Y reported US$23.0 billion in global revenues, and in US dollar terms, the revenue actually declined 6.8% from 2008 to 2009.”

By service line, Audit 2009 revenues were US$9.95 billion versus US$10.69 billion in 2008, down 6.9% in U.S. dollar terms but a 0.5% increase in local currency terms. In the global financial services industry, Audit services' revenues actually grew 7%.

Advisory services revenues of US$6.07 billion in 2009 decreased versus US$7.27 billion in 2008, by a whopping 16.6% in U.S. dollars terms and 6.6% decline in local currency terms. However, Advisory in China and the Middle East posted double-digit growth.

Tax services revenues in 2009 of US$4.09 billion versus US$4.73 billion in 2008, a 13.4% decrease in US dollar terms and a 4.3% decrease in local currency terms. But certain practices within Tax did very well: Transfer Pricing grew 5.3%, Indirect Tax grew 8% and International Executive Services grew 7.8%, all in local currency terms.

By geography, Americas Region 2009 revenue of US$6.31 billion versus US$7.17 billion in 2008, decreased 12% in US dollar terms and 8.6% in local currency terms. Bright spots included Brazil with 5% growth, Mexico with 8.2% growth, Venezuela grew 22.9% and Chile's revenues rose 22.7%, all in local currency terms.

In Europe, Middle East and Africa, combined KPMG member firm 2009 revenues of US$10.73 billion versus US$12.41 billion in 2008, dropping 13.5% in U.S. dollars terms and 0.6% in local currency terms. Middle East and South Asia was the fastest growing sub-region in Europe; and KPMG in Africa had a 9.3% growth in local currency terms.

In Asia Pacific, combined 2009 revenues of US$3.07 billion decreased 1.1% in U.S. dollars terms but grew 3.9% in local currency terms. Some countries posted spectacular results: Korea had 19.4% growth, Vietnam and Cambodia each had 17.5% growth, and Japan had 7.2% growth, all in local currency terms. KPMG said that Asia Pacific member firms are beginning to see an increasing number of M&A transactions especially in China and Korea.

Revenues in the BRIC countries as a group grew 4.3%. Middle East and South Asia was the fastest growing practice with a 25% growth rate. KPMG’s BRIC headcount increased by 11.5% this year, with BRIC headcount nearly quadrupled in the past ten years.

In 2008, KPMG had 137,000 people and this number was reported in 2009 at 140,000 people, a increase of 3,000 net of hiring over attrition.

Our Analysis:

A drop in revenue was expected, the surprise was the magnitude of the drop, which was higher than other Big4 firms.

Growth in emerging markets was expected. Decrease in developed countries was also on the cards.

Tax revenue decrease (in double digits) was more than anticipated. Advisory decline was expected, with M&A activity drying up.

BRIC increase was expected also, most Big Four firms have had excellent performance in these countries.

Compared to all other firms, KPMG had the largest drop in revenues from 2008 to 2009, this could be either attributed to KPMG’s uniqueness among Big4 firms, being the smallest, as also having a year that ends that started in September 2008 and ending in September 2009, a full three months behind other Big Four firms, and encompassing perhaps the worst of the global financial crisis.

KPMG maintains its 4th place as the smallest of the Big Four firms in 2009. Its sharp drop from 2008 to 2009, indicates that it actually lost ground in 2009 versus 2008 against its next closest rival Ernst & Young on the revenue front.

What’s really interesting is that while the results are already out on PR newswire, the KPMG.com site has yet to be updated with its own firm 2009 performance!

With all the Big Four having reported 2009 results, we’ll be coming out shortly with the 2009 Big Four Firm Financial Performance Study. Stay tuned.

KPMG Europe Revenues Drop 0.4% As Expected, Audit Shines

KPMG Europe LLP, which covers the UK, German, Swiss, Spanish and Belgian practices just reported its 2009 revenues at €3.5 billion in the year ending 30 September 2009, a 0.4% drop from 2008 on a pro forma basis at constant exchange rates. Overall, KPMG said that top-line growth proved hard to come by as a result of difficult market conditions.

In the UK, revenues were €1.9 billion, down 1.6% (This translates to approximately GBP 1.7 billion). Compare this to Ernst & Young UK which grew 2009 revenues by 8% to GBP 1.4 billion (some of it due to merger), PricewaterhouseCoopers UK 2009 revenues rose 1% to GBP 2.25 billion, while Deloitte UK 2009 revenues shrank 2% to GBP 1.97 billion.
In Germany, revenues were €1.2 billion, down 1.7%
In other countries put together, revenues were €0.4 billion, up 2.7%

By service line, Audit revenues were €1.28 billion, up 3.1%; and proving to be the bright spot across services and geographies. Tax revenues were €837 million, down a whopping 5.4% due to low M&A activity but transfer pricing service demand was strong. Advisory was flat at €1.4 billion, with lower M&A offset by restructuring and debt advisory work.

KPMG also said that since 30 September 2009, member firms in the Netherlands, Luxembourg, the CIS and Turkey joined KPMG Europe ELLP, which now comprises firms in 14 countries - including the six in the CIS (Russia, Ukraine, Armenia, Georgia, Kazakhstan and Kyrgyzstan) - and has combined pro forma revenues of €4.5 billion with 31, 000 employees.

John Griffith-Jones and Rolf Nonnenmacher, joint chairmen of KPMG Europe LLP, said: "This was a creditable performance against the backdrop of the worst financial crisis in almost 80 years. We might have hoped for better economic conditions in our second year as a merged firm but rather than put our expansion plans on hold we have continued to pursue a whole range of strategic initiatives that will shape our performance over future years.

Looking ahead, Rolf Nonnenmacher and John Griffith-Jones said 2010 would be another challenging year, though there were encouraging signs of economic recovery.

As expected, and in line with other Big4 firms, European revenues in 2009 came in lower than 2008 by a modest percentage. UK revenues for KPMG were below E&Y and PricewaterhouseCoopers but just a shade better than Deloitte UK. KPMG Europe also includes only the developed nations of Europe this year. Next year, with the addition of other firms, notably Turkey and CIS, the combined firm not only enjoys a higher level of revenue but also likely a higher level of overall growth as the Big Four firms have been showing higher increases in revenues in less developed nations. Also, the impact of foreign exchange rates on KPMG Europe is muted, as most of transactions are done either in Euros or British Pounds.

This was expected and inline level of performance with no unusual surprises, and flat revenue is creditable given the very tough conditions all over Europe in 2009. KPMG is also the last firm to report in the year, and by being delayed till end of September 2009 (versus mid year 2009 for other Big 4 firms), we can see that the economic impact on Big4 firms still continues. 2010 looks to be equally tough, though some good news is rising on the horizon for the global economy.

We are still awaiting KPMG International 2009 results for year ending 30 September 2009 which could be released any time now, and bring to close all the reporting for Big4 firms in 2009.

Big Four Firms Dominate Best Places to Intern Rankings

If you want to find a great job upon graduating from college, then starting early appears to be the secret.

Business Week and Bloomberg just released their third annual listing of top undergraduate internship programs in the country based on pay and the percentage of interns who get full-time jobs, and feedback from career services directors.

And the Big Four firms completely dominate this ranking, taking the top four of the five top spots, beating out such well-known companies as Goldman Sachs, General Electric, Microsoft, Boeing, Cisco, and Johnson & Johnson.

The number one spot goes to Deloitte which also placed number 1 in the recent best places to launch your career rankings. Interns pocket a cool $10,000 for the summer, and very likely to go back to Deloitte with a confirmed offer. It must be a worthwhile experience, since 7 of 10 entry level hires were previous interns. However, there are relatively a lot of spots available which seemed to have held steady despite these tough times for hiring,

2009 Rank - 1
2008 Rank - 4
Employer - Deloitte
Interns hired in 2008 – 2,200
Interns hired in 2009 – 2,233
Intern hiring planned for 2010 – N/A
2009 Average hourly wage ($) - $24.50
2009 Average total pay for interns ($) - $10,000
2009 Interns who received full-time job offers (%) - 73
2009 Interns with offers who accepted (%) - 80
2009 Entry-level hires who were former interns (%) - 70
2009 Best Places to Launch a Career Rank - 1

KPMG bags the second spot on this ranking, shooting up 3 places from 2008, it placed number 4 in the recent best places to launch your career rankings. Interns seem to get more pay than even number 1 Deloitte by taking home $10,900 for their efforts. The likelihood of going back to KPMG after the internship is extraordinarily high, 9 of 10 interns get a confirmed offer, and 9 of 10 appear to accept. Also a huge 91% of entry level hires were previous interns. The number of internships seem to be shrinking at KPMG, with 500 less spots next year than in 2008.

2009 Rank - 2
2008 Rank - 5
Employer - KPMG
Interns hired in 2008 – 2,200
Interns hired in 2009 – 1,745
Intern hiring planned for 2010 – 1,700
2009 Average hourly wage ($) - $24.80
2009 Average total pay for interns ($) - $10,900
2009 Interns who received full-time job offers (%) - 90
2009 Interns with offers who accepted (%) - 93
2009 Entry-level hires who were former interns (%) - 91
2009 Best Places to Launch a Career Rank - 4


The third place winner in Ernst & Young, staying flat from its spot in 2008, it was just behind Deloitte in the recent best places to launch your career rankings. Interns make the least dough among Big Four firms for their diligence. The likelihood of going back to the firm is also as high as KPMG, 9 of 10 interns get a confirmed offer, and 9 of 10 appear to accept. But it is interesting to see that 4 of 10 new hires do not actually intern with E&Y, which tells you that if you miss the cut this year, there’s still a good chance of a full time offer. Ernst & Young is actively reducing the number of internships, with 800 less spots next year than in 2008.

2009 Rank - 3
2008 Rank - 3
Employer – Ernst & Young
Interns hired in 2008 – 2,507
Interns hired in 2009 – 1,971
Intern hiring planned for 2010 – 1,800
2009 Average hourly wage ($) - $22.00
2009 Average total pay for interns ($) - $9,585
2009 Interns who received full-time job offers (%) - 92
2009 Interns with offers who accepted (%) - 92
2009 Entry-level hires who were former interns (%) - 60
2009 Best Places to Launch a Career Rank - 2

PricewaterhouseCoopers, the largest Big4 firm on the planet gets fifth place, behind Proctor and Gamble, and falling 3 spots from #2 spot in 2008. PwC was behind Deloitte and E&Y in the recent best places to launch your career rankings. Interns make just a smidgeon less than Deloitte, but have a good shot at going back to the firm, 9 of 10 interns get a confirmed offer, and 9 of 10 appear to accept. As with E&Y 3 of 10 new hires do not actually intern with PwC, so if the intern bus leaves this year, there’s still a good chance of a full time offer. PwC is holding nearly flat its number of open spots.

2009 Rank - 5
2008 Rank - 2
Employer – PricewaterhouseCoopers
Interns hired in 2008 – 2,320
Interns hired in 2009 – 2,278
Intern hiring planned for 2010 – 2,175
2009 Average hourly wage ($) - $23.75
2009 Average total pay for interns ($) - $9,878
2009 Interns who received full-time job offers (%) - 89
2009 Interns with offers who accepted (%) - 93
2009 Entry-level hires who were former interns (%) - 69
2009 Best Places to Launch a Career Rank - 3

Accenture has moved up smartly to number 9 from a #47 spot in 2008. Accenture was 11th place in the recent best places to launch your career rankings. Interns get the lowest rate on a per hour basis, but seem to make it in hours to make almost the same as another Big4 firm. 2 of 10 new hires do not actually intern with Accenture, so looks like the internship program is not the only route to a job at Accenture.

2009 Rank - 9
2008 Rank - 47
Employer – Accenture
Interns hired in 2008 – 198
Interns hired in 2009 – 122
Intern hiring planned for 2010 – 150
2009 Average hourly wage ($) - $21.00
2009 Average total pay for interns ($) - $9,975
2009 Interns who received full-time job offers (%) - 95
2009 Interns with offers who accepted (%) - 85
2009 Entry-level hires who were former interns (%) - 22
2009 Best Places to Launch a Career Rank – 11

There are two clear take-aways from this ranking. First, Big4 firms are a great place to have an internship, and the chosen ones seem to like it well enough to begin their careers there. Second, career planning just got moved a year ahead if we take these high percentages to be true – if you didn’t make the internship list, it's a tough road to get an entry level job. But let that not dissuade candidates who want to work at a Big Four firm, as many alumni can agree, hiring of experienced level candidates happens all the times and at different points in a career, there’s a lot of depth, breadth and requirements for external professionals in all Big Four firms.

But if you’re a junior at a college though and reading our blog, you’re better off getting serious at those internship campus interviews right away.

Here's the link to the Business Week Ranking

Accenture Makes Right Decision, Drops Tiger Sponsorship

Just now, on the Accenture.com website Newsroom, we find the following news update:

“Accenture Sponsorship Update

Related Assets December 13, 2009NEW YORK; Dec. 13, 2009 – Accenture (NYSE: ACN) today announced that it will not continue its sponsorship agreement with Tiger Woods.

For the past six years, Accenture and Tiger Woods have had a very successful sponsorship arrangement and his achievements on the golf course have been a powerful metaphor for business success in Accenture’s advertising. However, given the circumstances of the last two weeks, after careful consideration and analysis, the company has determined that he is no longer the right representative for its advertising. Accenture said that it wishes only the best for Tiger Woods and his family.

Accenture will continue to leverage its “High Performance Business” strategy and “High Performance Delivered” positioning in the marketplace. The company will immediately transition to a new advertising campaign, with a major effort scheduled to launch later in 2010.”

We applaud this decision. Accenture has made the right choice.

As we have said earlier, Tiger’s private persona has got entangled so much with his public personality, that there was collateral damage to his sponsors. We argued that continuation of sponsorship is tantamount to condoning immoral behaviors of Accenture’s advertising front man, and sends the wrong signal to its clients and employees.

Accenture has finally taken the correct moral decision, and we stand vindicated in our point of view, which we forcefully expressed before the scandal grew to such enormous positions.

This has just come out on the Accenture website, and clearly there will be speculation on Accenture’s next steps. Serendipitously, 2010 is just round the corner and Accenture can start off on the right foot for its marketing campaigns. On its own, Accenture is a strong global brand, has excellent operating management and enviable financial performance. It will continue to create shareholder value in good measure in the future on its own steam.

Tiger was helpful to the brand when it was appropriate, not simply convenient. We may say that the circumstances have changed to make the association inappropriate, but not inconvenient. Disengagement may be troublesome in the near term, but prove to be substantially right over the long term.

This courageous decision, as we had anticipated, came earlier than other sponsors, and had done the firm, its employees and its alumni proud.

We’ll have more on Monday when the dust settles and more reaction is available.

Note that this is likely to come up on December 17, 2009 conference call, when Accenture reports is Q1-2010 results.

Tiger Drops Golf, Accenture Drops Ads

Yesterday, Tiger Woods made a public statement that he was taking an indefinite break from professional golf on his home page. Much has been made of the exact words used in this statement. Regardless this was the perhaps the right (and very tough) decision to make under these trying circumstances.

Tiger, who was in the middle of the storm, blinked first.

And that perhaps makes it an easier decision for his sponsors.

We can understand the feelings involved in Tiger’s staying away from his key passion. Golf made Tiger, and Tiger was golf, and he has been the greatest ever player of the game till now. That is undeniable, his game was a joy to watch, and his victories were treasured moments for all golf fans. On the golf course, he was a consummate player and a fierce competitor, and his “championship face” showed his intense concentration and desire to win. Golf viewership and victory purses soared whenever he was in contention. Tiger was compelling and his game and strategy were delightful. This we grant and cannot take away at all.

Tiger may return to golf one day, claim his few majors and yet become the greatest player ever of the game. But his indefinite is as vague as the Federal Reserve Board’s intention to keep interest rates at zero percent for an indefinite period. Someday, things will change from status quo and the public will forget all about it all, with some other bizarre occurrence occupying its fickle mind.

Unfortunately, his personal behavior has been out of sync with being a master of a tony and elite sport. And that has been the cause of his present downfall. We want our heroes to be pure and ethical and beyond mere mortal corruptions.

And our issue here is not with Tiger the individual, rather with his sponsorship relationships. And in particular with that of a Big4 firm, Accenture.

His sponsors, in a very tight spot yesterday, are probably breathing a sigh of relief. A tough decision on their part became much easier today.

AT&T and Gillette have already made announcements and likely to step away soon.

In case of Gillette, Tiger will be phased out from TV and print ads, public appearances and other efforts linking the two entities together. Damon Jones, Gillette spokesman, said,
"This is supporting his desire to step out of the public eye and we're going to support him by helping him to take a lower profile."

In case of AT&T, spokeswoman Susan Bean said, "We support Tiger's decision and our thoughts will be with him and his family. We are presently evaluating our ongoing relationship with him."

Accenture, the other key sponsor, has not made a public statement as yet, but has been proactively fading Tiger away as their advertising front. Three days ago, Tiger Woods prominently featured as the only graphic on their global home page www.accenture.com. Two days ago, there were two other graphics which shared the page along with Tiger. And yesterday, the Tiger graphic was gone.

Also, other references to Tiger in their advertising campaigns were being aggressively removed with many relevant pages showing up as errors. Accenture ads also changed, with Tiger’s photograph being taken away overnight. Much has been said on social media about Accenture’s tag lines on Tiger advertisements, and what seems very normal under former circumstances, now have an undeniable second meaning, all too inappropriate.

In our earlier post, we said:

“We think however, that Accenture should stop sponsoring Tiger Woods right away. This, in our opinion, is the right moral decision. Accenture is a well-regarded, respected squeaky-clean brand signifying class, ethics and high standards. It is a tough decision to disassociate from an advertising front man, but that front man has not kept his end of the bargain, and has caused injury to his wife and family.

Continuation will send a wrong message to Accenture"s employees and clients that such behavior is not reprehensible since it can be justified to be monetarily beneficial. Accenture may not be unduly hurt financially by this step, and its own future actions rather than its association with Tiger will prove its corporate success.

We would think Accenture alumni will think similarly and will be proud that Accenture chose the right moral decision rather than the right business decision. In this case, we believe Accenture should blink first, regardless of the consequences.”

We sense that Accenture is quickly stepping away from Tiger Woods, but has not made a public statement as yet about sponsorship. And this has accelerated each day as more unsightly Tiger news hits the wires. Bloomberg claims Acenture spokesman Alex Pachetti didn’t return calls seeking comment.

And we still maintain that Accenture should make a public statement to discontinue its association and sponsorship. Continuation is certainly not the right course of action, and our non-scientific poll of visitors on www.Big.com indicates that 67% agree that Accenture should stop.

We understand that the sponsorship is worth $10-$15 million on an annual basis. This money is best allocated to other activities to promote the Accenture brand.

The coming week will have more concrete developments, and we hope that what we are looking for will show up in the next few days.

China and Brazil Lead IPO Comeback In 2009

In consonance with a smart pickup in global equity markets from a trough in March 2009 to near January 2009 values towards the end of this year, Initial Public Offerings have also gathered a lot of steam.

Ernst & Young’s year-end 2009 Global IPO update shows that the dollar value of deals in the first 11 months of 2009 till November 2009 of $95 billion is at the same level as the first 11 months of 2008, though there were only 495 deals in 2009 versus 740 deals in 2008. For the full year 2009, E&Y expects the deal value to exceed $100 billion.

While 2008 was not a great year compared to the go-go 2007, this update clearly points to stability and a potential bottoming out of the IPO marketplace. And that, in a year full of glum news, is some cause for celebration.

After a dull first half 2009, IPO activity picked up in the second half, mainly due to deals from Asia and South America, which raised $69 billion in listings year to date 2009, about 72% of the total IPO value. Emerging markets provided the boost to capital raisers, and developed world capital markets took a real backseat in this regard. Of the top 10 IPOs, six were from emerging markets.

China and Brazil have been the key drivers of global IPO activity.

Large scale stimulus and focus on domestic consumption in China, have created near 9% growth each quarter in China this year, and Chinese stockmarkets were the first to move up in 2009. Chinese companies, with ample growth opportunities were tapping both the Hong Kong and Shanghai stock markets to gather capital from investors. China State Construction Engineering Corp, which listed in Shanghai in July 2009 at $7.3billion, and Metallurgical Corp of China Ltd ($5.2 billion on the Shanghai and Hong Kong stock exchanges) were the top IPOs for 2009.

Brazil’s economy and stock market have been the fastest growing this year, and low inflation, higher commodity prices and general optimism pushing Brazil to be a top flyer in capital markets. Banco Santander Brazil SA was the largest IPO in 2009 and the largest in Brazilian history, raising $7.5 billion.

In North America, IPO value actually declined 38%, from $27 billion in the first 11 months in 2008 to US$17 billion with 66 IPOs listed in 2009

In Europe, IPO value actually declined 66%, from $14 billion in the first 11 months in 2008 to US$5 billion with 50 IPOs listed in 2009

In Middle East IPO value actually declined 85%, from $13 billion in the first 11 months in 2008 to US$2 billion with 16 IPOs listed in 2009

By sector, industrials (77 IPOs); materials (68) and high technology (55) led by numbers of IPO. Financials, industrials and real estate accounted for 50% of total capital raised.

No surprise then that the Hong Kong Stock Exchange and Shanghai Stock Exchange jointly accounted for 36% of all IPO capital raised on the entire planet in 2009.

Gregory K. Ericksen, Global Vice Chair Strategic Growth Markets for Ernst & Young had this to say about growing power and confidence in emerging markets, “The principal exchanges in China, India, Brazil and other emerging markets are now mature enough to source funding for the very largest companies seeking listings.”

Bankers in New York and London had better be worried. Big deals are being done in the East and in the South, and there appears to be enough talent and demand in those markets, that they may continue to stay there. The BRIC countries, as we have seen in almost every survey and study, will be the head horsemen as the global chariot finally leaves behind this awful recession for better roads ahead.

Tiger Woods Dilemma for Accenture – Cloud or Cancer?

Using celebrities as company advertising fronts has both immense rewards and equally high risk. On the positive side, associating with a well-known, successful and popular personality provides instant brand recognition, enhances the company by association and quite often works off the image already created and crafted by that celebrity. The risk however is that any negative impact to that celebrity creates collateral damage for the company, and a long-term association is difficult to quickly unwind.

With his recent accident in Florida and the ensuing public brouhaha, Tiger Woods has been dominating the internet and tabloids with some less than salubrious news. His image as a clean, conscientious family man has taken a huge beating, and his purported dalliances outside his marriage have completely tarnished his public persona.

This has already lead to collateral damages for his numerous commercial sponsors, including Accenture, Pepsi-Gatorade, Nike, NetJets, Gillette, Golf Digest and Electronic Arts. Most sponsors have stated that they will stick with and stick by Tiger through these trying times. As of today, only Gatorade has dropped Tiger by discontinuing its Gatorade Tiger Focus line of energy drinks, and Gatorade claims that this decision was made months before this recent incident.

Tiger reportedly makes $100 million dollars each year from these sponsorships; and has made over $1 billion over his career-to-date, the highest ever by a single athlete.

We think Tiger Woods poses a dilemma for Accenture.

Accenture has been closely associated with Tiger Woods for several years now, the company advertisements (both on print, TV and the internet) prominently feature Tiger, often facing difficult conditions, but with brimming confidence that he will find a way out, as he has done so many times in real life in golf tournaments. Accenture’s “Go On, Be A Tiger” tag line has been a hit, with its pithy admonition for companies to make calculated investments (with Accenture’s help, of course) and come out winning. There are many other memorable lines, including “Opportunity isn’t always obvious”, and “It’s what you do next which matters”, which have served Accenture well as Tiger has gone on to the highest possible levels in professional golf with amazing talent.

In addition, Tiger is the front man at Accenture Match Play Championships, which he has won several times, and he did launch his 2009 season after returning from reconstructive knee surgery. The association between Accenture and Tiger is quite strong (and likely quite lucrative) for Tiger, but the reverse association is actually more so for Accenture. Note that on its own, Accenture is a strong global brand and very well known in its industry and to corporate clients all over the world.

So Accenture has a lot riding on Tiger maintaining his image. The unintended consequences for the company can be quite high. The swirl of bad news and with more revelations showing up each day is likely causing some concern at Accenture HQ.

That is not to say that it will be devastating, in fact, investors, the ultimate owners of the company don't particularly seem to mind. A Motley Fool survey of investors got Accenture a respectable and solid 4 star as a stock investment, and Goldman Sachs recently upgraded Accenture to buy with a price target of $50.

The key question is whether this is a Cancer or a Cloud.

Is Tiger’s public image permanently damaged, with no chance of recovery? Or is it a passing scandal, which after living out its short life will pass away and out of the public’s very short term memory. Note that in previous scandals with well known athletes (think Michael Jordan, Mike Tyson, Kobe Bryant etc.) though dominated the news at the time did all eventually melt away as the public moved on to the next cheesy news. And these athletes did go on to win public favor and do even bigger things in their careers.

If a Cancer, then Accenture is better off pulling its sponsorship right away. And if a Cloud, its probably better to stay and wait it out till things subside.

Of course, the same decision has to be likely made by each sponsor, and this opens up a fascinating game theory problem. If all sponsors drop at the same time, and it is really a Cloud, regardless it is deemed a Cancer; and Tiger and all sponsors lose. If sponsors continue, they are sending a message that it is a Cloud; and the scandal is a mere distraction.

The problem happens when they don’t act as a pack.

If one sponsor decides it's a Cancer, and other sponsors decide it’s a Cloud, then the former sponsor loses the game as the athlete comes back swinging. Conversely, if one sponsor decides it's a Cloud, and other sponsors decide it’s a Cancer, then the former sponsor has a big public image loss.

The key question is who blinks first?

Of course, with the passage of time, does the decision become easier; and the optionality value dies a little.

Accenture looks to be playing it safe. It’s gently pulled out all its ads with Tiger Woods on the internet, and it appears that all prime time TV ads have been stopped. The www.accenture.com home page, which on December 7th, 2009 had a large graphic of Tiger Woods, has been now replaced with two additional graphics on December 8th, 2009, so that the Tiger Woods graphic now only shows once every three times the home page is retrieved.

Accenture has not yet made a public statement that it is either staying with or trenching Tiger. It is keeping its options open and doesn’t want to the first to blink.

We think however, that Accenture should stop sponsoring Tiger Woods right away. This, in our opinion, is the right moral decision. Accenture is a well-regarded, respected squeaky-clean brand signifying class, ethics and high standards. It is a tough decision to disassociate from an advertising front man, but that front man has not kept his end of the bargain, and has caused injury to his wife and family.

Continuation will send a wrong message to Accenture’s employees and clients that such behavior is not reprehensible since it can be justified to be monetarily beneficial. Accenture may not be unduly hurt financially by this step, and its own future actions rather than its association with Tiger will prove its corporate success.

We would think Accenture alumni will think similarly and will be proud that Accenture chose the right moral decision rather than the right business decision. In this case, we believe Accenture should blink first, regardless of the consequences.

There will be certainly daily, if not hourly developments on this front, and we will continue to blog on this topic. Accenture’s final actions and subsequent events will make for a fascinating case study. If any readers have any insights on this, we welcome your comments.

KPMG Global Business Outlook Validates Current Optimism and Confidence

KPMG recently released its Global Business Outlook Survey on global manufacturing and services. And it has good news for the world economy and some unexpected surprises.
Overall, the survey indicates that, with manufacturing and service sectors getting more confident, there are robust growth prospects for the world economy over the next 12 months.

In October, there appears to be renewed optimism for 2010, with sentiment being highest in the US and the BRIC area, although EU and Japanese companies also anticipate solid gains in output. We already know about rosy prospects for BRIC, but US’s leadership position is unexpected and a pleasant surprise. Brazil is set to post a particularly marked expansion, whereas India is expected to underperform its BRIC peers. Overall, revenues and profits are expected to increase at solid rates.

Services are expected to lead manufacturing by a slight amount in this recovery, as typically service industries are much faster to react to demand upturns that longer lead time manufacturing industries. Correspondingly, hiring intentions are strongest in the service sector, although manufacturers also anticipate a rise in staffing levels.

The most upbeat expectations for activity in the service sector are by Post & Teleco companies, followed by Renting & Business Activities firms. In manufacturing, confidence is highest in the Chemicals & Plastics and Timber & Paper sectors. Further, within services, labor-related costs are predicted to be a higher contributing factor to inflation than outsourcing and all other non-staff costs.

Inflation is expected to show up in 2010, as both input costs and output prices are expected to increase, although at a benign rate, with inflationary expectations being highest in the BRIC region. Japanese companies, as in previous years, are anticipating continued deflation.

On the jobs front, the one-year outlook comes out looking broadly positive. Jobs are expected to be added in both services and manufacturing sectors, with services leading the way. Among all nations, the BRIC countries and the US are expected to lead the expansion. European service providers anticipate only a modest rise in staffing levels, mainly Italy, the UK and France, while Japanese companies are looking to a marginal reduction.

We have said earlier that Big Four firm surveys are a good barometer of executive mood and actual business performance and act as a leading indicator of when the world economies will emerge from their slump. Over the last six months, we have noticed that surveys from PricewaterhouseCoopers, Deloitte and Grant Thornton have all been signaling that the worst is over, and optimism is generally back. This corroborates other business and consumer confidence indices all over the world, as well as a good upswing in stock and asset prices since March 2009. This comprehensive survey from KPMG only validates the recovery story better. The survey has a lot of coverage on results by individual country and sector and recommended reading for those planning, budgeting, investing, hiring or otherwise interested in the global prospects for 2010.

The complete 69 page survey is at http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/Business-Outlook-survey-November-2009.aspx

The survey uses net balances to indicate the degree of future optimism or pessimism for each variables, which can vary between -100 and 100. A value of 0.0 signals a neutral outlook for the coming 12 months. Values above 0.0 indicate optimism amongst companies while values below 0.0 indicate pessimism. The net balance figure is calculated by deducting the percentage number of survey respondents expecting a deterioration/decrease in a variable over the next twelve months from the percentage number of survey respondents expecting an improvement/increase. The current report is based on responses from around 6,200 service and manufacturing firms worldwide.

Deloitte Versus KPMG in Dubai World Saga

Just in the last few days, Dubai World (DW) shocked investors all across the world in announcing that it will take steps to seek a six month standstill period on payments of interest and principal on $59 billion of its outstanding debt. This terse and surprising announcement on late Thursday November 25, 2009, the eve of a national holiday in Dubai, spooked stockmarkets all over the globe, with Asian and European markets reacting immediately on open with a 3% drop, before recovering somewhat over the day on Friday.

Middle Eastern and South Asian markets, countries with most exposure to Dubai business, dropped precipitously if not in percentage terms, then certainly in confidence in the city-state’s future. On Thursday, the first full trading day in Europe since Dubai’s announcement, the FTSE 100 index in London lost 3% to close down 171 points, the DAX index in Germany fell 3.25% and the CAC-40 index in France lost 3.41%. In Tokyo, the Nikkei 225 stock average, was less affected, falling about 0.62%.

Dubai World (DW) is Dubai’s (one of the seven United Arab Emirates) state investment fund which makes portfolio and real estate investments both in the country and abroad, including the QE2 cruise liner, the Emirates airline and the Travelodge budget hotel. DW’s debt of $59 billion is 75% of the total $80 billion debt of the country. DW has principal real estate investments through its arm Nakheel with its glamorous resorts on man-made beaches at the Palm, exotic seven star hotels and the tallest building in the world.

Property prices in Dubai have slumped and buyers are nowhere in sight, thus sharply reducing incoming funds, while debt burden continues. DW borrowed heavily from commercial banks, especially in the UK to fund its various investments, and at that time, with the go-go attitude in the sheikdom, and with the implicit backing of a supportive government, banks were happy to part with their money. What seemed quite normal at that time is likely causing a lot of heartache now.

Dubai World has hired Deloitte and Rothschild to assist in its efforts to gain a standstill period from its debtors DW had a $3.5 billion bond payment due in December and wants some breathing space on all debt repayments which are due until the end of May 2010.

Aidan Birkett, the head of Deloitte UK’s 1,200 strong London Corporate Finance practice flew immediately on Wednesday with a large support contingent to Dubai. Aidan Birkett has handled such cases earlier and is no stranger to big-ticket debt restructurings. See his profile at

http://www.deloitte.com/view/en_GB/uk/services/corporate-finance/article/96909311586fb110VgnVCM100000ba42f00aRCRD.htm
http://www.deloitte.com/view/en_GB/uk/services/corporate-finance/press-release/e2e99c9096ffd110VgnVCM100000ba42f00aRCRD.htm

A Deloitte spokesman said: 'We can confirm that Aidan Birkett, managing director for corporate finance at Deloitte, has been appointed chief restructuring officer to Dubai World.'

Interestingly Aidan Birkett left PricewaterhouseCoopers UK in October 2000 along with three other senior partners Andrew Grimstone, Jerry Loftus and Stephen Knight to join Deloitte UK.

There seems to be some talk now that Abu Dhabi, Dubai’s oil-rich sister emirate would bail out DW to protect the credit rating and stature of the entire UAE, but again there is no definitive agreement that this would happen right away. Abu Dhabi has reportedly said that it would not do a blank-check bailout but deal with the issue on a case by case basis.

On the other side of the fence, big UK banks, namely HSBC, Royal Bank of Scotland, Lloyds Banking Group and Standard Chartered reportedly hold $30 billion or 50% of this debt and consequently quite invested to defend their interests and get the best deal possible on reclaiming their money back from the beleaguered DW. Data from the Emirates Banks Association shows that HSBC has exposure of $17bn, Barclays of $3.6bn and RBS has about $2.2bn.

They have hired KPMG to assist them in this endeavor, though there are reports that PwC is also in the running. KPMG will be formally appointed once the creditor banks have created a steering committee comprising five or six of the main lenders to lead the negotiations, it added. No one apparently at KPMG was immediately available to comment.

So, its Big4 firm versus Big4 firm in a battle that is certainly the first business news today all across the world. One issue that we would point out is that KPMG is the statutory auditor for one of DW’s portfolio subsidiary companies - Dubai Ports World (DP World), and this would create certainly, a direct if not indirect conflict, for KPMG, though at this point it is not clear how this conflict is going to be resolved. http://www.dpworld.com/ar/2008/inc/2008_DP_World_Annual_Report.pdf

In an editorial in the UK’s The Telegraph, influential bond investor, Mohamed A El-Erian, CEO and co-CIO of PIMCO said it in clear terms of why this is such a key development for the world, “Let Dubai be a reminder to all: last year's financial crisis was a consequential phenomenon whose lagged impact is yet to play out fully in the economic, financial, institutional and political arenas.”

See his entire editorial at
http://www.telegraph.co.uk/finance/economics/6678194/Dubai-what-the-immediate-future-holds.html

What drove the choice of Deloitte and KPMG is also not very clear at this time, why E&Y and PwC are out of the picture either by choice or by refusal is also not fully known. We will certainly learn more as this saga unfolds over the next few weeks, and we will keep you updated on latest developments as with the key role played by the Big Four firms in this riveting story.

Of course, if our readers have more news, ideas, insights or comments, we welcome their input.

Ernst and Young’s Top Entrepreneurs Maintain Vision Despite Tough Conditions

Entrepreneurs are hardy folks. Undeterred by current circumstances, they are entirely focused on their vision and a rosier tomorrow.

And in this deep and difficult recession, Ernst & Young found that entrepreneur-driven companies are still looking for growth and opportunity in these tough times by adapting their operating methods to set themselves up for market leadership when the economy does turn to the upside.

Ernst & Young surveyed the 250 winners of the 2009 Entrepreneur Of The Year program, and came up with these valuable findings from respondents:


Growth remains number one. Despite the downturn, 78% are still pursuing growth opportunities.

Clearly customers are always right. 78% have increased their focus on customer satisfaction and loyalty. 75% have plans to expand into new customer segments/ geographies.

Cash is king. However, only a fourth were still seeking to secure their cash position.

Maintaining innovation is critical. 60% wish to implement technology for higher business efficiency or accelerated growth.

Some M&A in the offing. 49% are thinking of purchasing distressed competitors, and 55% think the reason for such transactions would be to add strategic value as well as business growth.

Risk is being scrutinized. 37% place higher emphasis on geographic risk exposure

Act now. 45% are increasing the how quickly they are making decisions since the economic downturn.

Employee motivation. 57% are pushing their communication and transparency harder to retain employees. 46% are using the downturn as an opportunity to fill key strategic posts.


Entrepreneurs are some different as E&Y finds from other mature multinational firms in having higher emphasis on growth and acquisitions.

“This survey confirms that, even in the worst times, future market leaders are looking for growth…. Such trailblazers will be vital to the world’s economic recovery.” said Greg Ericksen, Global Vice Chair, Strategic Growth Markets, Ernst & Young.


We can recall hearing of many studies which indicate that the fastest-growth companies are born in a recession. Tough economic conditions provide the breeding ground for innovative, cost-focused, nimble and niche-focused companies. Why? Recessions mean lower competition, recessions means more focus on cash flows and recessions mean creativity to secure niches and gain revenues from demanding customers. Its not easy at all, since demand dries up totally and it calls upon guts and will to keep going in the face of current depression and hopes for a better tomorrow.

But E&Y’s selection of visionary entrepreneurs do stand out for a key reason. They seem to look past the cloud of economic downturn and to the silver lining. Growth and customers are the lifeblood of any business, and by staying focused on what brings in the cash into the door, this mindset lays out a good game plan for all business owners to survive and thrive.

When things do turn around, look for these terrific companies run by E&Y Entrepreneurs of the Year to show the path to success.

Deloitte Finds 2009 Holiday Shoppers Will Use A Lot More Social Media

Deloitte’s recently published 24th Annual Holiday Survey of retail spending and trends vindicates what you are likely seeing all around you. Consumers are expected to increasingly use social media for their holiday shopping this year.

Deloitte finds 17% of consumers plan to use social media in their holiday shopping, and among those, 60% plan to use it to find discounts, coupons and sale information. 53% plan to use social media to research gift ideas and 52% plan to check the gift wish lists of friends and family.

In terms of user demographics, 52% are 18-29 years old, 33% are 30-44 years old and 12% are 45-60 years old. 19% plan to use their cell phone to find store locations, research prices, find product info, get discounts and coupons and read reviews. 25% expect to make a holiday purchase with their phone. 22% will shop primarily online this year, and 44% will use an online coupon.

Here are some more interesting findings:

Consumers May Not Return to Old Habits
Consumers have not only changed their shopping habits for this year, but this could well be a permanent change. 26% will spend less in the future than prior to the recession. 44% say they are loyal to stores they like, but make fewer trips or purchase less at them. According to Deloitte’s Stacey Janiak, “…Consumers will not return to spending levels seen before the recession anytime soon, and high-volume discretionary purchasing could remain a thing of the past.”

Men More Optimistic Than Women and Spending More
Women are less optimistic about the economy, and 53% of women would spend less this holiday season, compared to 43% of men. 50% women say the economy will improve next year, compared to 58%.

Sustained Interest in Green
20% say they plan to purchase more eco-friendly products this holiday season than they did in the past. 47% are willing to pay more for a green gift.

The survey polled 10,878 consumers between September 24 and October 2, 2009.

Here’s what we have to say:

First, this is a big win for social media in general and also for US consumers. Last year, social media (whether it be Twitter, Facebook, MySpace or LinkedIn) would not have made the radar either in terms of affecting the overall consumer psyche, much less impact retail buying behavior. US consumers are turning out to be a smart lot and social media has also gained ground. So it does make a whole lot of sense that cost-conscious consumers with increasing usage of networks, connections and friends are able to scout out and take advantage of deals. It’s harder to say whether retailers will win or lose, clearly lowest prices will be discovered quickly and consumers will gravitate to them, but retailers can also use social media and use viral marketing to their advantage to buzz their products at fractions of cost of normal advertising.

Second, we wonder how social media will be used. Will stores Twitter about what’s on sale on a shelf? Will you get instant info on whether size 9 is available at Neiman Marcus in the color you’re looking for? Will your friend Twitter you on a great discount she has found? Will retailers announce midnite sales with throwaway prices and bitly their coupon? Will you get a sales invite or coupon from your friend on Facebook? Will you become a fan of Sports Authority and buy a golf set when it comes on sale? Will groups of friends on Facebook converge at a retailer site to make a bulk purchase to gain discounts? And many such others.

Third, we would not be surprised if both consumers and retailers find innovative ways to clear both the information and goods market. This is the serendipitous juxtaposition of a high volume of consumers, retailers and smart social media platforms. And this will likely lead someone to come up with a unique way to leverage social media, and some sharp entrepreneur will pick it up create a new service. Exciting, isn’t it?

In any case, don't be surprised this year if you see one of every three 38-year old women set down their iphones in a mall, expand a bitly link on their Twitter account, come up with the bar code on Twitpic and scan it on the cash register to get a pure cashmere wool sweater, originally $125, for just $32!! That’s the real deal.

A Wake-up Call For America

We saw this on the Grant Thornton home page, and the title was so tantalizing, it was too good not to dig in and blog about it.

This recently released study by David Weild and Edward Kim indicates that a sharp fall in US publicly listed companies is generally driving a depression in US stock markets and further, that it has inhibited economic recovery, impaired the job market and undermined U.S.competitiveness. The deep underlying cause for this – severe changes to the market structure over the last twenty years.

The effects are well known, and we read the authors’ 44 page report to see if the connection to IPOs is well founded. We’ll quote verbatim from the report to make points and we’ll add our own analysis and observations.

First of all, we must say it is a compelling read with some disturbing trends and conclusions that vividly show that the US has experienced serious decline of leadership in the IPO market, and overseas markets have seen rapid growth in IPO listings, especially in Asia, where listings have more than exceeded their strong GDP performance.

“The Great Depression in Listings,” as Grant Thornton calls it, is the precipitous decline over the last decade in the number of publicly listed companies in the United States. Consider in 2008, there were 6,943 publicly listed companies in the US, a full 38% lower than the previous peak of 8,823 US companies, and this comparison looks even worse at minus 55% if you adjust this number for intervening GDP growth. The authors think that the number of companies in the US should actually double to keep up with “replacement” level of what is needed on a relative basis.

What has led to this significant drop? The authors list three key causes:

1. Problems in market structure are undermining the United States’ global competitiveness. Essentially, US listed markets are in secular decline since 1991

2. The number of new listings needed merely to maintain the United States’ listed markets is much larger than expected. US lags Asia and its capacity to generate new listings is well below replacement needs. The US needs 360 new listings per year merely to maintain a steady number of listed companies in the U.S.

3. The lack of new listings in the United States’ markets is threatening the U.S. job market. This impacts small businesses the most, and the authors calculate that up to 22 million jobs may have been lost because of the broken US IPO market.

Grant Thornton has a strong argument that the underlying reason for “The Great Depression in Listings” is not Sarbanes-Oxley, but what they call “The Great Delisting
Machine,” an array of regulatory changes that were meant to advance low-cost trading, but have had the unintended consequence of stripping economic support for the value
components (quality sell-side research, capital commitment and sales) that are needed to support markets, especially for smaller capitalization companies. GT cautions that today, capital formation in the U.S. is on life support. Within the venture capital universe, the average time from first venture investment to IPO has more than doubled.

The authors content that low cost trading, the advent of the online brokerage (ETrade, Ameritrade etc.), new order handling rules, decimalization (remember the cute fractions for stock prices), Sarbox and the global research settlement has led to a culture of “Casino Capitalism” in the US markets. Black pools of capital, unregulated hedge funds, naked and predatory shorting, high-frequency trading, and credit defaults swaps (the menace which led to this recent recession) are all rampant and rapidly spreading in US markets. The charts show that high frequency trading accounts for 70% of all US equities trading.

Is all lost? The authors point to two solutions which can help, and Grant Thornton urges Congress and the SEC to hold immediate hearings to understand why the U.S. markets have shed listings at a rate faster than any other developed market, and to pursue solutions that, together with thoughtful oversight, will advance the U.S. economy, grow jobs, better protect consumers and reduce the deficit — all without major expenditures by the U.S. government:

1. Alternative public market segment: A public market solution that provides an economic model to support the “value components” (research, sales and capital commitment) in the marketplace. This solution would establish a new, parallel market segment that benefits from a fixed spread and commission structure. It would be subject to traditional SEC registration and reporting oversight (e.g., annual and quarterly reporting, Sarbanes-Oxley compliance).

2. Enhancements to the private market: A private market solution that enables the creation of a qualified investor marketplace — consisting of both institutional investors and large accredited investors — that allows issuers to defer many of the costs associated with becoming a public company before they are ready for an IPO. This market would serve as an important bridge to an IPO.

The first one is almost a throwback to the eighties with fixed commissions to support value-adding trading activites, while the second calls for a shadow market where unregistered securities can be freely transacted by legal investors.

The report is full of charts which support the (rather distressing) conclusions, and Grant Thornton has provided insights and trends not heretofore studied in this manner. The historical facts are clear and point to a crisis in IPO markets in the US.

The authors draw a dramatic conclusion that 22 million jobs have been potentially lost due to the decline of IPO listings since 1997. This is a huge number, and though the presented math seems to support this, it is arguable whether so many jobs have not been created in the US, and conversely if the IPO market were to revive, that we could create equal numbers on the rebound. Clearly, a large number of US jobs have not been created since more companies did list outside the US - but 22 million, that just stretches our envelope. Does going IPO automatically create jobs? And don’t pre-IPO companies hire employees, regardless of whether they list in the US or not?

Doubtless, there is a crisis in the US IPO markets, and this issue is getting compounded each year. If action were not taken now, the US could lose the lead it has held for decades in global capital markets. The situation is dire indeed, and all regulators and lawmakers should react to save the US from certain followership.

This report is a must-read for all players in the capital market space, and we trust you will find the results equally astounding.

Clearly, this is a wake up call for America, and the title does full justice to the seriousness of this problem.

Here's the report on GT's website.

Checkout Our “The Best Of “Twitter Lists – Love Your DM or RT

Twitter just released its latest exciting functionality - Twitter Lists, and we think it’s awesome and very timely.

It allows us to curate who we think are the most appropriate Tweeters to follow in our niche space of The Big Four Firms, accounting, finance, tax, jobs and related topics.

We have already created some list, which we are calling “The Best Of”. We rather like this name, but we’ll evolve as lists get more ingrained, and may change.

For example after our search, all the Twitterers we think are most relevant to follow for Deloitte happenings in the Twitter universe, we have added to our “The Best of Deloitte” list.

This is our subjective selection, and we think it's a pretty good one. That’s not to say that we have completely covered all the bases, so if there is someone that just needs to be on or off any of these lists, please DM or shout out to us @big4alum. Thanks in advance.

Also, we’ll continue to refine and add/subtract to this list over time, but our intent is to keep them highly relevant and focused. We see that some of our list already have some followers and no doubt this will pick up as Twitter Lists get more ingrained and Twitter itself allows tweets and Twitter Lists to be retweeted.

So, here are our lists – follow us or follow the lists, and keep that feedback going!!

All The Lists
http://twitter.com/big4alum/lists

Best of Accenture

http://twitter.com/big4alum/best-of-accenture

Best of Capgemini

http://twitter.com/big4alum/best-of-capgemini

Best of Deloitte
http://twitter.com/big4alum/best-of-deloitte

Best of Ernst & Young
http://twitter.com/big4alum/best-of-ernst-young

Best of KPMG
http://twitter.com/big4alum/best-of-kpmg

Best of PricewaterhouseCoopers

http://twitter.com/big4alum/best-of-pwc

Best of Accounting

http://twitter.com/big4alum/best-of-accounting

Best of Finance

http://twitter.com/big4alum/best-of-finance

Best of Tax

http://twitter.com/big4alum/best-of-tax

Again, we’re at http://www.twitter.com/big4alum

Top Companies in Deloitte’s 2009 Tech Fast 500 Sport Phenomenal Sales Growth

Recently, Deloitte released its 2009 Technology Fast 500 Rankings, an annual ranking of the fastest growing technology, media, telecommunications, life sciences and clean technology companies in North America.

The criterion – grow the fastest in revenue over five years. And the number 1 winner - ReachLocal, a privately-held global provider of localized Internet advertising solutions based in Woodland Hills, CA, with revenue of $147 million and a 5-year fiscal growth rate of (get this!) 146,050% percent. In 2004, ReachLocal’s revenues were just $100,000 and in 2008, its revenues had catapulted to $147 million, yes that’s in millions.

And here’s what this company does: “ReachLocal brings order to the fragmented local Internet by connecting advertisers, publishers, and creative solutions providers together on one platform. Wherever customers are online, ReachLocal helps businesses find them with the broadest reach of local digital media, a dedicated force of local Internet Marketing Consultants, and technology that continually optimizes results.”

Here are the top ten winners of this ranked list:

(Rank Company Sector Five-year Revenue Growth CEO)

1 ReachLocal Internet 146050% Zorik Gordon
www.reachlocal.com

2 Infinera Corporation Communications/Networking 86580% Jagdeep Singh
www.infinera.com

3 Affymax, Inc. Biotechnology/Pharmaceutical 54768% Arlene M. Morris
www.affymax.com

4 Hughes Communications, Inc. Communications/Networking 49988% Pradman P. Kaul
www.hughes.com

5 Entropic Communications, Inc. Semiconductor 40691% Patrick Henry
www.entropic.com

6 Onyx Pharmaceuticals, Inc. Biotechnology/Pharmaceutical 38769% N. Anthony Coles
www.onyx-pharm.com

7 Data Domain, Inc. Computers/Peripherals 35084% Frank Slootman
www.datadomain.com

8 Genomic Health, Inc. Biotechnology/Pharmaceutical 33716% Kimberly Popovits
www.genomichealth.com

9 Zila, Inc. Biotechnology/Pharmaceutical 27715% David R. Bethune
www.zila.com

10 Force10 Networks, Inc. Communications/Networking 24528% Henry Wasik
www.force10networks.com

Here are some interesting facts about this ranking:

The Western region of the United States has the highest concentration of ranked companies (34%), followed by the Northeast (28%), Southeast (15%), Canada (10%), Southwest (8%) and Midwest (5%).
The software sector was 38% with 189 companies, followed by communications/networking (16%), biotechnology/pharmaceuticals (13%) and Internet (9%). Comprising the balance 24% were medical equipment, scientific/technical instrumentation, computer/peripherals, semiconductors, media/entertainment and clean technology companies.

In the top 10, there were 4 biotech and pharma but no software companies. Deloitte added clean technology as a new category in 2009 and 7 companies made the list.

The average growth rate for the Fast 500 fell by 720% to 2,486% in 2009, from 3,206% in 2008. The 10-year high was recorded in 2002, when the overall average growth rate was 6,772%, the 10-year low was in 2007 with average growth of 1,823%.

To make this list, current-year revenues must exceed $5 million USD or CD, and doubled in last 5 years.

We are quite amazed by the ultra-strong growth exhibited by these Fast 500 Tech companies, clearly with the average company growing by 2,500% means that they have multiplied their sales by 2.5 times in five years. Clearly, such growth is mainly doable in tech companies, where innovative research, visionary management and new solutions can find receptive customers, either by changing the current paradigm or offering services which provide value to a growing list of customers. Also interesting to note the total absence of software companies in the top 10, is the era of Microsofts gone for ever?

Given that statistically, most small businesses fail in their first five years of starting up, these companies deserve much acclaim, and thanks to Deloitte for granting that much needed recognition.



Deloitte’s 2009 Technology Fast 500™ Ranking

Huron Consulting Group Q3-2009 Operations Strong, Shares Zoom

Huron Consulting Group Inc. (NASDAQ: HURN) just reported its Q3-2009 results, with revenues of $172.2 million increasing 2.1% from $168.7 million in Q3-2008 and up sequentially from $165.8 million in Q2-2009. However, more importantly, Huron took a $106.0 million non-cash pretax goodwill impairment charge, about 20% of the total goodwill balance of $506.5 million as of June 30, 2009. In addition, there were restructuring and restatement charges of $15.1 million. The GAAP loss per share including the aforementioned charges was $(3.16) in Q3-2009 compared to diluted earnings per share of $0.12 in Q3 2008.

Non-GAAP adjusted diluted earnings per share was $0.59 in Q3 2009 compared to $0.86 for Q3 2008(7). This change is almost entirely due to the increase in the effective tax rate. Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), which excludes share-based compensation expense, non-cash compensation expense, restructuring charges, non-recurring expenses related to the restatement, goodwill impairment charge, and an other gain, was $38.1 million, or 22.1% of revenues for the third quarter, compared to $40.8 million, or 24.2% of revenues, in the comparable quarter last year.

Average number of full-time billable consultants totaled 1,430 for Q3-2009 compared to 1,488 for Q3-2008. Average number of full-time equivalent professionals totaled 861 for Q3 2009 compared to 947 in the same period last year.

By terms of Operating Segments comparing Q3-2009 versus Q3-2008, Health and Education Consulting revenues increased 30%, Legal Consulting revenues dropped 23%, Accounting & Financial Consulting sales fell 24%, and Corporate Consulting revenues fell 14%. Thus, the 2% increase in sales for the company covered a lot of difference in performance across segments.

Digging below the reported loss, Huron actually had some good financial nuggets in this quarter’s results. Cash from operations did increase from $44 million in Q3-2008 to $52 million in Q3-2009. And cash on the balance sheet increased from $14 million in Q3-2008 to $27 million in Q3-2009.

The accounting restatement of $106 million, from the goodwill impairment, had only a non-cash impact on financial results.

Huron indicated for full year 2009, revenues would be in an updated range of $650 million to $665 million. The Company also anticipated GAAP loss per share in a range of $(2.01) to $(1.80), non-GAAP adjusted diluted earnings per share in a range of $2.85 to $3.05, loss before interest, taxes, depreciation and amortization in a range of $(13) million to $(8) million, and Adjusted EBITDA in a range of $139 million to $144 million.

These were quite good results and investors cheered, pushing the stock up 16% (HURN open $24.57 to $26.99 at 10 am) on the open, and up 10% ($25.90 at 4 pm) at the end of trading today November 5, 2009.

Why? Huron’s operations seemingly are intact. Q3-2009 revenues actually rose and operating income and adjusted EBITDA fell only slightly. The accounting restatement had only a non-cash impact on financials, and more critically, the issue was contained, measured and fully absorbed in just a few months after disclosure. Hopefully it is done.

Clients don’t seem to be abandoning Huron as was widely anticipated, if anything Health and Education clients are giving more business to Huron. Sales in the other segments did decrease, this may be due to general economic slowdown. Huron has fewer consultants than it had a year ago, but utilization has only fallen by a few percentage points. Costs are being managed in line with top line declines.

2009 outlook of revenues of $660-$665 million are almost flat to full year 2008. This is cash coming into the door paid for by clients who are purchasing Huron services. Also, full year 2009 EBITDA of $139-$144 million is higher than $122 million of EBITDA in full year 2008.

The stock is on its climb back, it fell from $45 at end of July 2009 to $12 after the goodwill announcement, but has more than doubled since that time. As we have blogged earlier, this seems to be a cloud rather than a cancer for the company, if new management sets things right for investors and clients stay, HURN could potentially look to regain its erstwhile level of stock price in the medium term.

Here’s some background on the accounting restatement right from their release:

“The Company announced on July 31, 2009 that it would restate its financial statements for the fiscal years 2006, 2007 and 2008 and the first quarter of 2009. On August 17, 2009, Huron completed the restatement. The restatement pertained to the accounting for certain acquisition-related payments received by selling shareholders of four acquired businesses that were subsequently redistributed by such selling shareholders among themselves and to other select client-serving and administrative Company employees based, in part, on continuing employment with the Company or the achievement of personal performance measures.

The selling shareholders were not prohibited from redistributing such acquisition-related payments under the terms of the purchase agreements with the Company for the acquisitions of the acquired businesses. However, under GAAP, such payments were imputed to the Company, and the portion of such payments redistributed based on performance or employment was required to be reflected as non-cash compensation expense of the Company, even though the amounts received by the selling shareholders did not differ significantly from the amounts they would have received if such portion had been distributed solely in accordance with their ownership interests. The restatement was necessary because the Company did not record such portions of the acquisition-related payments as a separate non-cash compensation expense with a corresponding increase in paid-in capital.

Based on the results of the Company’s inquiry into the acquisition-related payments to date and the previously disclosed agreement amendments with the selling shareholders, earn-out payments for periods after August 1, 2009 are accounted for as additional purchase consideration and not also as non-cash compensation expense. The Company recognized $1.2 million of additional non-cash compensation expense during the third quarter of 2009 related to the redistributed acquisition-related payments for the period from July 1 to July 31, 2009.

The restatement resulted in a reduction of approximately $56 million in net income and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for all restated periods. However, the restatement had no effect on Huron’s total assets, total liabilities or total stockholders’ equity on an annual basis. Further, the Company did not expend additional cash with respect to the compensation charge, and the restatement had no effect on Huron’s cash or net cash flows from operations.

As a result of the significant decline in the price of the Company’s common stock following the Company’s July 31, 2009 announcement of its intention to restate its financial statements, the Company engaged in the previously announced impairment analysis with respect to the carrying value of its goodwill in connection with the preparation of the financial statements for the quarter ended September 30, 2009, and recorded a $106.0 million non-cash pretax charge for the impairment of goodwill, which was approximately 20% of the Company’s total goodwill balance of $506.5 million as of June 30, 2009. The impairment charge was recognized to reduce the carrying value of goodwill associated with the Company’s Accounting & Financial Consulting and Corporate Consulting segments. The impairment charge is non-cash in nature and does not affect the Company’s liquidity.”

Capgemini Q3-2009 Revenue Down 9%, But Confirms 7% Operating Margin for 2009

Capgemini just reported its Q3-2009 financial results with revenues of EUR 1,946 million, which was 9.0% below Q3-2008 revenues of EUR 2,098 million on constant exchange rates. On a reported basis revenues were 7.3% lower. Capgemini attributed this to a decline in the economic environment, and a sharp reduction in corporate IT spending.

In terms of segments, Consulting Services and Local Professional Services revenues fell 12.5% on average, and those activities most vulnerable to the economic cycle falling the most. Outsourcing Services provided an offsetting effect with a 2.7% decline in revenues due to the expected – and announced – fall in business under a major contract in North America.

In terms of geography, UK and Ireland revenues gained 1.5%, North America revenues fell 7.3%. Revenues in other regions fell 13.3% on average, with France posting a fall of 9.9%.

Q3-2009 bookings were EUR 1,981 million, with Outsourcing Services bookings increasing 7% over Q3-2008, in Consulting Services, Technology Services and Local Professional Services, the book-to-bill ratio remained above 1.

Capgemini provided some forecasts for Q4-2009, estimating it would drop 9% versus Q4-2008, but the company confirmed an operating margin % of around 7% for full-year 2009. Capgemini indicated that signs that activity is stabilizing and even picking up in some market segments, though benefits are not expected to filter through immediately.

Let’s break down this for some interesting conclusions:

First, the revenue decline is generally in line with Accenture’s Q4-2009 and other Big4 firms which have recently reported. Capgemini reports in Euros, so it was spared some of the negative impacts of the appreciating US dollar which hurt many of the other Big Four which report in US dollars.

Second, Outsourcing is clearly resonating with clients, and cost-conscious customers are looking to large IT companies to help them reduce their own infrastructure costs. A relatively smaller fall in Outsourcing revenues is also in line with what Accenture recently reported.

Third, bookings in the Q3-2009 were actually slightly ahead of revenue, indicating that the pipeline is not growing as fast as one would like, but certainly not shrinking.

Fourthly, Q4-2009 guidance of a 9% drop indicates that the second half of 2009 would be weaker than what Capgemini guided in its Q2-2009 earnings release, where it indicated that H2-2009 revenues would drop between 4% and 6%. The company seems to be managing costs in a tough environment and keeping expenses generally in line with the decline in top line. Operating margin in 2009 is expected to be 7% versus 8.5% achieved in full year 2008.

Finally, recent reports and chatter on Twitter indicates that Capgemini will be strongly expanding in India, and pushing its Business Information Management services. With Outsourcing strong and Kanbay hopefully fully incorporated into operations, India clearly seems to be a strong source of revenue and growth for the company in the future.

Investors seemed to be quite neutral to this announcement and the stock stayed about EUR 31 per share on Euronext, though Capgemini has retreated from its highs of around EUR 37 reached in mid October 2009.

With markets stabilizing, and reasonable growth prospects ahead, 2010 may show better results from the company.

All Big Four Firms Make The World’s Top 50 Most Attractive Employers List

We have blogged earlier about Universum, the employer branding company, particularly on their MBA and undergraduate surveys of top employers. The Big Four firms, Deloitte, Ernst & Young, KPMG, PricewaterhouseCoopers and Accenture typically make the top ranks in their surveys.

Now they have come up with the world’s Top 50 most attractive employers, their first global index of employer attractiveness which highlights the world’s most powerful employer brands, those companies that excel in talent attraction and retention.

To come up with these results, nearly 120,000 students at top academic institutions in US, Japan, China, Germany, France, UK, Italy, Russia, Spain, Canada and India chose their ideal companies to work for.

And the Big Four firms are again on the very top of this list. Against some very tough competition and some very tough critics (students!) all the firms made the Top 10 Global top 50 business list, in august company of Google, Goldman Sachs, McKinsey and Microsoft. Accenture was just a tad behind at rank 23.

Global Top 50 Business

Company Ranking 2009

Google 1
PricewaterhouseCoopers 2
Microsoft 3
Goldman Sachs 4
Ernst & Young 5
Procter & Gamble 6
J.P. Morgan 7
KPMG 8
McKinsey & Company 9
Deloitte 10

Accenture 23

Interestingly, Universum also put together a global top 50 engineering company list, and the Big Four firms also make good rankings on that list as well, again aside top companies such as IBM, Intel, BMW and General Electric. In this list, Accenture was the first of the Big Four at rank 20, with KPMG making the last of the lot at rank 47. Big Four firms are not typically known for engineering, so we are certainly surprised at this. Perhaps the definition is broader than just hardcore engineering, in which case, the Big Four firms do offer services in hardware, software, outsourcing, system design, ERP, social media and disciplines related to business information technology.

Global Top 50 Engineering

Company Ranking 2009
Google 1
Microsoft 2
IBM 3
BMW 4
Intel 5

Accenture 20
Deloitte 29
Ernst & Young 33
PricewaterhouseCoopers 37
KPMG 47

In any case, Big Four professionals can feel quite proud of this ranking, and alumni can use this in their cocktail conversations!

Big Four Firms Dominate UK’s Large Cap Market, Is Big Three Possible?

The Financial Reporting Council (FRC), the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance just published its Fourth Progress Report on the implementation of the MPG recommendations on Promoting Choice in the UK Audit Market.

While the report generally deals with progress on a number of FRC’s key strategic initiatives, there is a very interesting analysis on the concentration of the auditing market in the UK which is dominated by the Big Four firms, Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers.

Here is the summary conclusion from the report, “Appendix 2 shows changes in market concentration from 2006 to August 2009. Since that date the market has see a slight increase in the number of FTSE 350 companies with non‐Big Four auditors, although looking at the latest figures compared with those in February 2009, it is possible that this trend may now have stalled. Subsequent to August 2009, the FRC is aware of at least one FTSE 350 company which has changed from a non‐Big Four auditor to a Big Four firm. Non‐Big Four firms remain strong in AIM and to a lesser extent in the FTSE Small Cap and Fledgling indices.”

This Appendix has a lot of information on market concentration statistics. Essentially it looks at public companies represented in the four key UK indices (FTSE 100, FTSE 250, FTSE Small Cap and AIM) and shows the percentage of public companies in each index audited either by a Big Four or non Big Four firm. The time period spans November 2006 to August 2009.

There are some startling findings and interesting conclusions from this study.

In the FTSE 100 in August 2009, PwC audited 41% of public companies, KPMG audited 25%, Deloitte audited 21%, E&Y audited 15% and non-Big Four audited 1%. In the FTSE 100 in November 2006, PwC audited 42% of public companies, KPMG audited 22%, Deloitte audited 18%, E&Y audited 17% and non-Big Four audited 0%.

In this large capitalization segment, it is clear that the Big Four firms clearly dominate this market. Non Big Four firms have a negligible share of this market. Yes, that’s a measly 1%. It is certainly up from 0% a few years ago, but nothing to write home about. It also appears that KPMG and Deloitte took share from other two Big Four firms, this could be due to the large size of KPMG UK and KPMG Europe; and Deloitte’s increasing share of the Big Four pie.

In the FTSE 250 in August 2009, PwC audited 28% of public companies, KPMG audited 21%, Deloitte audited 26%, E&Y audited 20% and non-Big Four audited 6%. In the FTSE 250 in November 2006, PwC audited 31% of public companies, KPMG audited 23%, Deloitte audited 24%, E&Y audited 19% and non-Big Four audited 3%.

In this larger set of public companies, while the Big Four firms have a majority share, non Big Four firms have a reasonable share which has doubled in recent years. PwC’s share loss is noticeable over this period


In the FTSE Small Cap in August 2009, PwC audited 22% of public companies, KPMG audited 21%, Deloitte audited 19%, E&Y audited 18% and non-Big Four audited 20%. In the FTSE Small Cap in November 2006, PwC audited 23% of public companies, KPMG audited 20%, Deloitte audited 18%, E&Y audited 20% and non-Big Four audited 19%.

In these smaller sized companies, it is clear that while the Big Four firms have a four-fifths of the market but the non Big Four firms also enjoy a 20% share.


In the AIM in August 2009, PwC audited 11% of public companies, KPMG audited 15%, Deloitte audited 11%, E&Y audited 8% and non-Big Four audited 55%. In the AIM in November 2006, PwC audited 10% of public companies, KPMG audited 13%, Deloitte audited 10%, E&Y audited 7% and non-Big Four audited 60%.

In the alternative market, the Big Four firms actually are in a minority position with the non Big Four firms having a majority share, though this share has decreased by a substantial 5% over the last few years.


Overall, it is evident that large public companies overwhelmingly choose Big Four firms as their auditors. The high concentration in this sub-segment clearly limits choice for multinational companies which may require either deep auditing expertise or substantial presence in countries all over the world, which clearly rules out smaller firms, leaving the field completely to the larger behemoths.

As we travel down into the smaller capitalization companies, non-Big Four firms have increasing share, either since the Big Four firms do not devote resources to penetrate this segment or the non Big Four firms offer more customized services to smaller clients who may not need the sophistication or breadth of a large public accounting firm. This stands to reason too. The loss of share of non-Big Four firms in AIM is troubling.

The demise of Andersen has significantly concentrated market power in just four firms. The exit of any one of these firms, if at all conceivable, can have a significant impairing impact on choice for clients. The choice is narrow already. Conflicts between audit, tax and consulting rules out certain choices for public auditors. And if that pool were to shrink, choice would completely disappear.

We have argued in our earlier blog posts that the reduction of the Big Four to Big Three would have serious financial impacts on the audit and tax industry, on financial markets and on investors in all countries all across the world. The structure in other countries may not be exactly as the UK, but quite similar, with Big Four firms dominating the upper client echelon. Financial regulators and market participants would at all costs avoid the failure or exit of any player or combination of players. We think No Deloitte & Young, No KPMGPwC, No EYPwC or any other alphabet soup. Consider that the KPMG was penalized $450 million in the US, but allowed to continue as a firm after paying that fine. The aftermath is too difficult, we believe, to live with.

While the ultimate fear of an exit may be unfounded, Paul Boyle, Chief Executive of the FRC, did say, “The FRC remains concerned about the significant uncertainty and cost which could arise in the event that one or more of the Big Four audit firms left the market. Regardless of the actions taken by market participants, this risk is likely to remain significant in the medium to long term. It remains to be seen whether market-led actions will prove to be sufficient to reduce this risk to an acceptable level.”

Clearly this is a concern for governmental regulators, and though Mr. Boyle claims the risk is “significant”, we would think that the possibility of occurrence is very small. The Big Four will continue to the Big Four for a long time to come. We really like our site name as it is!!

What do you think about exit, demise or combinations? Possible? Probable? Allowable? ???