Why Deloitte Didn't Divide

On Mar. 31, accounting giant Deloitte Touche Tohmatsu abruptly abandoned plans to split off its consulting business. In remaining a combined firm, Deloitte stands alone. All of its rivals have split up -- either by selling consulting units or spinning them off as independent public companies -- and although it's not illegal for the two to remain joined, the Securities & Exchange Commission generally forbids accounting firms to do consulting for audit clients. Deloitte says it will abide by that rule. It has little choice. Pushed reluctantly toward splitting, it waited too long and lost its chance.

Chairman James E. Copeland Jr. had long argued that audits were improved, not tarnished, by association with consultants. So it wasn't until early 2002 that Deloitte decided to do a management-led leveraged buyout of its consulting practice, which at least left the consulting partners in charge of their business.

That's when the problems started. As Copeland describes it, the first sign of trouble came when Deloitte asked its lenders what terms they wanted if the firm gave up its consulting revenue. Although Deloitte is private, it has a strong balance sheet and borrows at terms comparable to -- or better than -- an A-rated company. Copeland expected the lenders would ask for slightly higher interest, maybe a paydown of debt. But by this time, Andersen had dissolved, so the banks and insurance companies Deloitte borrows from insisted on much more onerous terms, including collateral to secure their loans.

Still they moved forward -- until last month's final blow. Declining revenue at the consulting firm, including the departure of most of its work for audit clients, meant it was not going to be able to cover debt payments adequately. "We were sort of chasing the economy and the credit market down a curve, and we never got far enough ahead of it to do the deal," says Copeland. By Nanette Byrnes in New York