Downturn batters the beancounters

WHEN PricewaterhouseCoopers announced plans to float off its consulting arm in April, there was jubilation in the Embankment headquarters. The partners in the accounting giant expected to pocket windfalls of about $1m (£685,000) each. One auditing partner said: 'It's time to be thinking about early retirement on a small hot island somewhere a long way from a balance sheet.'

Alas, it hasn't worked out like that for the PwC bean-counters. The proceeds from the sale - even if a hoped-for $4.5bn is achieved - will not go directly into the pockets of the 7,500 partners. It will be used instead to beef up various pension funds in the accounting group, which have been hit by the downturn in world share prices.

It is one more example of how things have gone sour for the accountants, as they go about hiving off their once-lucrative consulting divisions. Today's sale of KPMG Consulting in Britain and the Netherlands reveals how far expectations have sunk. The accountancy parent will receive just e657m (£423m) for the businesses, a fraction of what might have been expected if the deal had gone through two years ago.

At the height of the tech boom of 2000, Hewlett-Packard said it was prepared to offer a staggering $18bn in shares for the PwC Consulting arm. That deal collapsed alongside the Hewlett share price. One deal that did see the light of day was the $11bn in cash and shares paid by the French consultants Cap Gemini for Ernst & Young's consulting division 18 months ago.

But that deal has no happy ending. The combined business, Cap Gemini Ernst & Young, has been in difficulties ever since, hit by high-profile departures, falling revenues, profit warnings and culture clashes. So far there have been 5,400 redundancies. Chief executive Geoff Unwin stepped down in December to be succeeded by Paul Hermelin.

The industry has been hit by a double whammy. First, the blue-chip companies that provide the bulk of revenues for these consultancies are pulling in their horns. After the huge expenditures on Year 2000 projects and - in Europe - on preparing for the euro, companies are pausing for breath. With corporate profits coming under severe pressure in many industries, it is proving to be a long pause. Companies are finding that their existing IT systems are perfectly capable of lasting for many years without major surgery. Some projects are being shelved indefinitely.

Second is the Enron effect. Client companies are under intense pressure, particularly in the US but elsewhere too, to split their auditing business from their consulting business. Accounts where the auditors also earn big consulting fees are being treated with suspicion. Those consulting arms still attached to auditing parents are finding that business is no longer coming in in the automatic way it once did.

Profits have been savaged in many IT consultancies. So have the share prices of the listed ones. Anglo-Dutch consultant CMG was a member of the FTSE 100 valued at £10.9bn at its peak. Today it is worth a mere £800m.

The price of the KPMG deal is equivalent to just 1.1 times last year's revenues. At the top of the market, consultancies were changing hands for three, four or even five times revenues. For many accountants, that hot island will have to wait a few more years.

Dutch in £423m swoop for KPMG