EY is setting aside $2.5bn to fund acquisitions for its consulting arm following its planned split from the Big Four firm’s audit business, as preparations for the historic split continue.
The war chest will allow the new firm, which EY aims to float in New York, to double down on dealmaking as it battles to win market share from Big Four rivals and independent consulting firms, according to people familiar with the plans.
Bosses have also earmarked a budget of up to $400 min to be plowed to build a new brand for the consulting business, which will no longer use the EY name after the split.
Global leader EY is trying to persuade its 13,000 partners around the world that its consulting and auditing arm can still grow faster, freed from conflict-of-interest rules that limit accounting firms advising audited companies.
Separation from the audit business will make the acquisition more attractive for the consulting arm spun-out because it no longer has to end the relationship with the client of the acquired company audited by EY, said Andy Baldwin, global managing partner of EY for client services.
“Each potential acquisition, an average of 25 percent of our revenue has to say goodbye in two days because we audit,” he said. “We will have no more conflicts.”
The partnership structure of the Big Four federations and their inability to raise equity funding have limited their ability to make large acquisitions in the past, but now they have become a big part of their strategy to expand their consulting arms.
EY has done 200 deals in the past nine years, generating about $1.5bn in annual revenue. The company had revenues of $45bn in the last fiscal year. In the current year expect to buy a company with an annual revenue of about $400mn, about three-quarters of which will be in the consulting business.
The financial plan for the consulting business after the launch – possibly at the end of this year, if the partners choose the plan and the market conditions improve – includes a cash war chest of $ 2.5bn, with the goal of obtaining an additional $ 1.5bn in annual revenue over the next two years, he said. people are familiar with the preparations. You can also issue shares to finance acquisitions, even if you don’t plan to start until two years after the split.
Targets will include firms that advise on corporate strategy, technology or environmental, social and governance (ESG) issues, as well as specialist law firms outside the US.
“When we spoke to law firms that wanted to join us, the conversation stopped when they learned about our independence rules, which meant cutting 20 percent of their business,” said Cornelius Grossmann, EY’s global legal leader. “Now we can have this discussion.”
Other investment plans after the spin-off include an increase in senior hiring and a push for technology investment for the tax advisory business.
EY has postponed a partner vote on the separation, which will begin in its largest market before the end of last year, until the end of the first quarter when it will work out more financial details.
The operational separation of the business could begin before the final vote has been held, however, according to insiders, and all but 40 of the 13,000 partners have now been allocated to new consulting firms or EY businesses that are still active. About 7,000 will be part of the general consulting firm, with 6,000 remaining with the audit-dominated partnership, roughly in line with the revenue split between the two arms.