EY Leaders Green Light Split Plan


Ernst & Young’s leaders fired the starting gun Thursday on a monthslong plan to split its consulting and auditing businesses, in a radical move that will generate windfalls for the firm’s partners and could upend the business model for accounting firms.

“This is something that will change the industry,”

Carmine Di Sibio,

EY’s global chairman and chief executive, said in an interview.

Rivals beg to differ. Deloitte, KPMG and PricewaterhouseCoopers have all said they plan to keep consulting and auditing under one roof. These other Big Four firms hope to exploit EY’s focus on its restructuring to poach clients and employees, according to people familiar with the matter.

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“That’s to be seen, who’s wrong and who’s right,” Mr. Di Sibio said. The proposed breakup “provides tremendous opportunities for our people, our clients and our partners,” he added.

The green light for the breakup from Mr. Di Sibio and other EY leaders means the plan will now go to a vote with the firm’s roughly 13,000 partners. “This is a big step…in a very complicated process,” Mr. Di Sibio said.

The far-reaching proposal would separate EY’s accountants who audit companies such as

Amazon.com Inc.

from its faster-growing consulting business, which advises on tax issues, deals and more.

EY projects a surge in growth and greater profitability for the consulting business once it is freed from conflict-of-interest rules that limit the services it can sell to audit clients. The firm audits Silicon Valley giants including Amazon,

Salesforce Inc.,

Workday Inc.

and Google parent

Alphabet Inc.

That limits its ability to compete in the fast-growing area of consultants teaming up with tech giants to sell outsourced services to companies.

The firm’s 13,000 partners are expecting multimillion-dollar payouts from the split. To pay for that, EY is planning to raise about $11 billion in a public sale of a 15% stake in the consulting company, which will also borrow some $18 billion, according to Mr. Di Sibio. He said a large portion of this money would be used to pay partners, but declined to specify the amount.

Mr. Di Sibio’s own windfall from the deal, expected to run into tens of millions of dollars, hasn’t yet been set by the firm’s board, he said. It also still has to decide whether it wants Mr. Di Sibio to postpone his mandatory retirement, scheduled for next summer, to run one of the new businesses. “I will do what the global board wants me to do,” he said.

Carmine Di Sibio, EY’s global chairman and chief executive, spearheaded efforts this summer to overcome concerns about the deal from the leaders of EY’s biggest member firms.



Photo:

Patrick t. Fallon/Agence France-Presse/Getty Images

EY’s strategy carries significant risks as well as potential big upsides, industry watchers said. Splitting the firm, which operates as a global network of separate firms in around 140 countries, is a costly, time-consuming effort.

“It’s a massive undertaking,” said Michael Shaub, an accounting professor at Texas A&M University. “It’s hard to imagine the number of issues that have to be resolved and how you navigate that.”

Splitting off the consulting arm involves nuts-and-bolts issues such as dividing shared resources from technology to human resources. More complicated will be a division of the firm’s big and lucrative tax unit, parts of which will go to both firms, and other practice areas.

“You can see that in theory [a split] would be appealing, but in practice is it going to turn out to be really complicated and expensive?” said Martin White, a senior analyst at Source Global Research, a consulting-industry research company.

The next challenge for the firm’s top executives is getting partners to approve the deal. Mr. Di Sibio spearheaded efforts this summer to overcome concerns about the deal from the leaders of EY’s biggest member firms, including in the U.S. and U.K. The protracted negotiations centered on how the money raised by the deal is split up, as well as drawing the dividing line between the two new businesses.

“While some people were on vacation, we were all working,” Mr. Di Sibio said. “We’re pretty comfortable that we’re [now] in a good place.”

The votes by partners in the separate firms in EY’s network will occur late this year and early next. EY doesn’t need all those firms to approve the deal for it to go ahead, according to Mr. Di Sibio.

“If the top 30 countries are in favor, we would move forward anyway,” he said. The China unit won’t be included in the breakup unless EY can gain approval for the split from local regulators, according to Mr. Di Sibio.

After the votes and logistics, the next step will be readying the consulting business for an IPO late next year. EY is paying for advice from several top-tier Wall Street banks and law firms, including

JPMorgan Chase

& Co. and

Goldman Sachs Group Inc.

“It is a big investment,” Mr. Di Sibio said, adding that much of the fees will be payable only if the deal goes ahead. When it comes time for the IPO, if the market is down too far, the deal will be postponed, he said.

If the deal does go ahead, the consulting company has to meet demanding growth targets, while likely operating without the EY brand, the people familiar with the matter said. Its performance will affect the value of the windfalls to the EY partners who join the new company, worth a typical seven to nine times their annual compensation, the Journal has previously reported.

Those windfalls will be paid in shares in the new business, over five years. The partners face a significant cut in cash pay, according to the people familiar with the matter.

Mr. Di Sibio declined to comment on the size of the likely cut to consultants’ cash pay. But, he said, “Overall compensation…will be very beneficial to the [consulting] partners.”

Audit partners are in line for a cash windfall worth an average of two to four times their annual compensation, the Journal has previously reported.

The industry split comes as the accounting firms are enjoying strong growth. Deloitte Thursday announced record revenue of $59.3 billion for the fiscal year that ended in May, up from $50.2 billion the previous financial year. EY also achieved record revenue for its 2022 financial year of $45 billion, up from $40 billion the previous year, the Journal has previously reported.

EY is in negotiations with hundreds of regulators worldwide to get approval for the split, Mr. Di Sibio said. The watchdogs welcome the reduction of conflicts of interest between auditors and consultants in the firm that would result from the deal, he added.

Regulators will want assurance the audit-focused partnership that will be created by the split will be able to withstand potential blockbuster litigation. EY is facing multibillion-dollar legal claims in Germany and the U.K. over its allegedly failed audits of two corporate blowups, fintech company

Wirecard AG

and hospital operator NMC Health PLC. EY has said it stands by its audit work.

Asked how much of the motivation for the split was to allow EY’s consultants to escape such audit-driven lawsuits, Mr. Di Sibio said it was “not a factor at all. Zero.”

Write to Jean Eaglesham at Jean.Eaglesham@wsj.com

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