For a group that specialises in corporate restructuring, EY might have done a better job of executing its own. The global accountancy partnership could not scale its Project Everest — a plan to split its audit and consultancy activities. The exertion has left its leaders red-faced, and a tad lost strategically.
EY’s ambition was sound. Auditors should not sell clients consulting services where conflicts exist. Regulators increasingly agree. EY’s heft in the audit segment precluded the consultancy from advising many companies. Splitting it out would resolve this. To list the consultancy could have proved lucrative for its 13,000 partners: a big cash payout for those in audit, and direct equity ownership for the consultants.
However, one of EY’s core competences — tax — straddles audit and consulting. Deciding which bits of the tax practice should end up where caused problems. The “perimeter” was a sticking point in the US. Regulators do allow auditors to sell some additional services. Split the tax practice though and there might not be enough expertise to go around.
That offers one “why” for US partners to scupper the deal. A more banal reason is that consulting looks less rosy these days. EY’s US arm has announced a $500mn cost reduction programme. Elsewhere, McKinsey reportedly could allow 1,400 heads to roll.
Capital markets, too, have softened considerably from just a few months ago. That was an unwelcome development for EY, seeking a premium valuation for its consultancy arm. A rumoured enterprise value of $100bn would have meant a valuation at 4 times last year’s sales, and 23 times its $4.4bn of ebitda last year. Accenture, meanwhile, trades on 15 times trailing ebitda and Capgemini on 10.
No quick fixes are apparent. Hiring lots of new tax experts for the consultancy side requires time and money. Regulatory disparities also means that different models work in different countries. EY — a network of franchises led by their local partners with varying voting rules in each locale — does not lend itself to rapid corporate action.
Given how bruising EY’s return to base camp has been, attempting another ascent soon looks unlikely.