jeff greene,WSJ Re:CSCO & LU " by hook or by crook."
"These acquisitions illustrate both Lucent and Cisco's fear of hardware commoditization and their commitments to creating strategic advantage by hook or by
crook."
This fron the WSJ
August 9, 1999
Cisco's Deal With KPMG
Faces Substantial Hurdles
By ELIZABETH MACDONALD and SCOTT THURM
Staff Reporters of THE WALL STREET JOURNAL
A plan by Cisco Systems Inc. to invest $1.05 billion in a large portion of
accounting firm KPMG's global consulting arm faces significant regulatory
hurdles.
On Saturday, the San Jose, Calif., computer networking company said it
would buy a 19.9% stake in a new business that would be called KPMG
Consulting. KPMG would own the remaining 80% or so of the entity,
which would wrap together KPMG's consulting practices in North and
South America, as well as parts of Asia (KPMG's European practice
won't be included). KPMG hopes to take the new entity public eventually.
New York-based KPMG plans to use the
fresh capital to build six technology centers
that will be staffed with 4,000 of its consultants
to deliver Internet-based data, voice and video consulting services to
Cisco's clients.
Cisco to Provide Hardware
Cisco, which makes equipment for routing computer traffic across
corporate networks and the Internet, will provide the hardware. "We
chose to make an investment in KPMG's consulting business because
KPMG understands how the Internet will reshape the future of all
businesses," said John Chambers, Cisco's president and chief executive, in
a statement.
The deal marks the first attempt to date by a Big Five firm to incorporate
its consulting practice and is the biggest consulting arrangement Cisco has
entered thus far. For Cisco, the alliance is a way to augment its business
easily. Cisco typically doesn't help customers install or maintain its
equipment, a gap KPMG now hopes to fill for the company. This is
particularly important as Cisco sells an increasing share of its gear to
telecommunications providers, who are accustomed to far more
hand-holding by their equipment suppliers.
But the deal marks a bold and risky gambit by KPMG. The Securities and
Exchange Commission still can nix the transaction by deeming it to be in
violation of the agency's auditor-independence rules, agency officials said.
The rules are intended to shield public auditors against any conflicts of
interest, including pressures from the accounting firms' consulting divisions
to go soft on their audits of corporate clients.
KPMG doesn't audit Cisco. However, the SEC finds problematic the
various business relationships outside companies such as Cisco bring to
such transactions. That would include the dozens of alliances Cisco has
with other public companies, many of which can be or eventually could
become KPMG audit clients.
Watching Outside Ownership
To date, the SEC has brought virtually no enforcement or disciplinary
action against a Big Five firm over these kinds of conflicts. An SEC
spokesman declined to comment. However, the agency already has told
KPMG that any outside ownership in a division controlled by the firm,
while KPMG still maintains an audit practice, could place the firm in
violation of the agency's auditing rules.
Stephen G. Butler, KPMG chairman and CEO, said: "The new entity will
comply with all of the SEC's independence requirements." He added: "If
the SEC has a specific concern, they should raise it."
KPMG's move to incorporate its consulting business, which Mr. Butler
expects by the end of the year, comes nearly a year after it first asked the
SEC to review and approve an initial public offering for its North and
South American consulting practice. But SEC Chairman Arthur Levitt as
well as the agency's chief accountant, Lynn Turner, raised serious
objections to the IPO, arguing outside ownership in KPMG could create
numerous conflicts with KPMG's auditors.
KPMG's Offer
To win SEC approval for the IPO, Mr. Butler said it told the SEC that
KPMG was "willing to give up control" of the consulting arm once it went
public, including keeping KPMG's ownership in the entity down to 30% or
less.
Unconvinced, the SEC recently asked KPMG to wait for new rules
governing the IPO from the Independence Standards Board, a separate
panel of accounting and SEC officials convened by the SEC to pass
standards bolstering auditor independence (Mr. Butler sits on this panel).
It's unclear whether the panel would permit or restrict such offerings.
Frustrated, KPMG changed its strategy and opted to incorporate, while
still pursuing an IPO sometime next year. KPMG considers the
incorporation of its consulting business "a pre-IPO transaction," said Rod
McGeary, a vice chairman of KPMG consulting, who will be co-president
of the new entity.
Two Cisco executives also will sit on the board of this entity, which
KPMG hopes eventually will become "more like a Silicon Valley firm than
a Big Five firm," Mr. McGeary said.
you said
This puts a little more light on the strategy of CSCO/KPMG and LU/INS:
newsalert.com. 11, 1999 06:01
Cisco and Lucent bet on consulting convergence
Consulting and integration services appear to be the new weapon of choice in the intensifying battle between Lucent Technologies (NYSE: LU) and
Cisco Systems (Nasdaq: CSCO) to sell their data and voice networking platforms into corporate America.
Just a day after Cisco announced a deal in which it would invest approximately $1 billion in the consulting firm KPMG International, Lucent
Technologies on Tuesday announced an agreement to merge with International Network Services (Nasdaq: INSS), a consulting firm that focuses on
data networking design and management, in a deal worth approximately $3.7 billion.
Both deals mark a shift away from the sale of point products and a move toward large-scale integration of networking equipment and services.
Consulting services are becoming increasingly important for both Lucent and Cisco in their efforts to promote data networking and telecommunications
platforms that can be sold across entire corporations or large service-provider infrastructures."The box-only business is dying fast," says Maribel Lopez,
analyst with Forrester Research (Nasdaq: FORR). "These acquisitions illustrate both Lucent and Cisco's fear of hardware commoditization
and their commitments to creating strategic advantage by hook or by crook."
Under the terms of the agreement between Lucent and INS, each share of INS stock will be converted into 0.8473 shares of Lucent. Based on Lucent's
August 9 closing stock price of $63.63, the merger would be valued at approximately $3.7 billion, or about $54 per INS share.
In Cisco's deal with KPMG, Cisco will invest $1 billion in KPMG, enabling the consulting firm to add 4,000 Internet integrators over the next 18 months.
Cisco, in turn, will receive a stake in the new KPMG Internet business unit.
BE AGGRESSIVE
Despite the fact that both companies affirmed their need for consulting support, Lucent appears to be taking a more direct approach with its outright
acquisition of INS, which it plans to combine with its own NetCare services and consulting business.
Lucent officials confirmed that they see consulting services as crucial to the company's growth.
"There is no question that professional services and support is critical to our business," said Pat Russo, Lucent executive vice president of strategy and
corporate operations, in a Tuesday conference call. "That can be summed up in one word: convergence. In today's multivendor environment, services
and support are increasingly critical."
"Lucent's always been more aggressive in this approach," says Jim Parmalee, analyst with Credit Suisse First Boston. "It's all about time to service. ...
If you can reduce time to service, you will ingratiate yourself with customers."
Mr. Paramalee says that while both Cisco and Lucent are using the consulting business as a strategic tool in their competition with one another, both
companies still have a reputation for strengths in different categories of the data networking and telecommunications business. Cisco is known for its
IP-based networking gear, says Mr. Parmalee, while Lucent is known for its optical, wireless, and voice equipment.
Ms. Russo noted that Cisco's and Lucent's simultaneous moves to shore up consulting support is indicative of the strategic importance of that
business. "As Cisco's investment in KPMG shows, it's pretty clear," she said. "You can't be a leader in communications unless you get into services."
The merger is expected to be completed during Lucent's first quarter of fiscal 2000, which ends on December 31, 1999, and will be accounted for as a
pooling of interests. Lucent officials indicated that the deal is not expected to have an impact of the current earnings forecasts.
CONFLICTS OF INTEREST
Although officials from both companies downplayed the strategic intrigue of the deal, INS's close ties to Cisco and the political nature of the consulting
business indicate that the competitive activity between Cisco and Lucent is heating up.
Cisco owns a little under 7 percent of INS, so the acquisition of INS by Lucent represents a complete shift in allegiance for the company. Cisco
declined to comment on whether it will hold its shares in INS through their conversion into Lucent stock. Cisco's initial investment of a little over $2
million -- made before INS went public in 1996 -- is now worth approximately $250 million.
In addition to holding a large stake in INS, Cisco is one of INS's biggest customers. A Cisco vice president, Donald A. LeBeau, has sat on the INS
board since October 1994.
Lucent officials downplayed the apparent conflict with INS's Cisco legacy, saying that the company continues to view consulting and integration as a
"multivendor" affair. "In networks today, it's very hard to find any single-vendor networks," said Ms. Russo. However, Ms. Russo also affirmed that this
was an opportunity to exert influence on INS customers. "There clearly is an opportunity to assure that lucent's capabilities in data networking are well
understood," she says.
The ownership of INS by Lucent may raise questions from customers who expect an objective third-party outlook from a consultancy. For example,
attempts to market Lucent products through INS may not be welcomed by existing INS customers.
"Their reputation has to be above the board," says Mr. Parmalee. "They will need to bend over backwards to prove this."e given away your entire
customer base to competitors," he says. |
