Spreading themselves among 75,000 employees at 110 offices in 46 countries, Accenture partners make up the world's largest management and technology consulting group. Revenue in 2000 topped $10 billion. Last summer, these consultants won a long struggle for independence from Andersen's accountants. In January, they began doing business as Accenture and in April voted to sell up to 20% of the firm to public investors. The $1.6 billion IPO, run by Goldman Sachs and Morgan Stanley Dean Witter, is expected in mid-July.
Should you be interested? No question, Accenture enjoys a market-leading position--4,000 recent clients from Microsoft to DaimlerChrysler to Sony. It has seen solid growth, with the past decade bringing 18% compounded annual revenue gains. Yet if you look closely at how Accenture has recast itself, it's plain who this deal will leave looking smart.
Much more than just Accenture's name has changed. Preparing to go public, it switched in May from a legal partnership to a corporation. Accenture "partners" still call themselves by that title, but strictly speaking they have become corporate shareholders. If the IPO goes off as planned, they will wind up with the 80% or so of the equity not held by public investors.
All this would be of mild interest, except for what's happening to Accenture's financial position along the way. On Feb. 28, the partnership's balance sheet showed a net worth of more than $1.9 billion. But in becoming a corporation, Accenture hollowed out its capital accounts, leaving a negative net worth of $1.1 billion. In other words, $3 billion in capital vanished.
Where was the "leakage," as one knowledgeable attorney I spoke with called it? Income taxes and sundry asset-transfer duties added up to a tidy $839 million. A final cash payment to Andersen settling the firms' divorce accounted for another $282 million. But most of it, more than $1.9 billion, is simply the result of Accenture's partners deciding to take nearly all of their capital out of the business. In their 80% stake, the partners have careers, reputations, and doubtless lots of sweat tied up. As for capital, they're leaving just $11 million.MIDWAY. So Accenture partners want public investors to fund a company they aren't funding themselves. This is a fact that the firm's securities filing discloses in only the most oblique way. At the same time, it prominently notes that partners aren't selling their own stock in the IPO, which would set off alarms for prospective investors. Yet neither should the partners' move to recoup their capital be ignored. Ashish Nanda is a Harvard Business School professor who studies partnerships, including Accenture, that switch to corporations. He told me to think of choices partners can make "as a continuum." A full cash-out by selling the entire company is at one end, and no cashing out at the IPO at the other. "What Accenture has done is somewhere in the middle," Nanda said.
Still tempted by Accenture? Just keep in mind how the deal is being cut. If the IPO comes to market as estimated at $14 a share, you would get stock valued near 1.3 times revenues, when shares of its nearest public-company rival, KPMG Consulting, trade at 0.9 times revenues (table). Accenture's average partner would wind up with stock worth $4.5 million, for which he or she paid next to nothing. You would wind up with stock that cost you sticker price, in cash. By Robert Barker