Outlook: Arguments for merger with KPMG don't add up

Deutsche Telekom; Amey and PPP
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The Independent Online

Only Andersen's competitors have reason to be pleased about the firm's now certain demise, and although the name of this once venerable firm of accountants may no longer be worth the paper it is written on, the further shrinkage of the Big Five into the Big Four is a deeply worrying development for everyone else involved. Those "others" include big corporates, investors, creditors, bankers, regulators and indeed anyone else with an interest in the efficient functioning of the capital markets.

Auditing needs competition as much as any other service or industry, to ensure reasonable costs, choice and standards. That the Enron collapse should result in the removal of one of only five practices capable of servicing multinational companies is a retrogressive and perverse reaction to the profession's worst-ever crisis.

Public confidence in the profession, and public trust in the audit, already shot to bits, is scarcely likely to be reinforced by the fact that there will be even fewer big players to chose from. No wonder Sir Howard Davies, chairman of the Financial Services Authority, is so concerned. Once the Big Five is reduced to the Big Four, the chances of getting a genuinely independent audit, free from conflict of interest, will be about zero. Furthermore, the chances of the audit becoming captive to the client's management, which was one of the most disturbing aspects of the Enron affair, becomes that much higher.

In normal circumstances competition regulators would have disallowed any further consolidation among the Big Five. A snowball in Hades would have stood a better chance than another merger. The gulf separating these global players from their closest domestic rivals is already far too large. But in circumstances where Andersen is going to melt away in any case, regulators may have no option. Brussels must now be kicking itself for being persuaded against most representations, including the advice of this newspaper, to allow the Price Waterhouse merger with Coopers & Lybrand.

That KPMG should now be the takeover partner of choice for Andersen will be of particular concern to the European Commission, since KPMG is already second only to PricewaterhouseCoopers in market share on the Continent, and in France and some other countries, the new firm would have an almost unassailable position.

Europe might therefore regard it as preferable to block KPMG and allow Andersen to go to the wall. In such a scenario, Andersen's business and personnel would get evenly spread between the remaining Big Four. In any event, Andersen seemed rather more certain than KPMG yesterday that a deal could be done. Forget the regulators, the major challenge is ring fencing the American partnership's Enron liabilities from the rest, and on this front there can be no certainty. The London partnership is particularly vulnerable to American litigation, having been responsible for the Enron audit in Europe. What's more, it relies for 30 per cent of its work on referrals from the US, making it highly vulnerable to the meltdown in Andersen's American partnership. What a mess.

Deutsche Telekom

As corporate survivors go, they don't come much more enduring than Ron Sommer of Deutsche Telekom. Mr Sommer is a chief executive for whom the description "beleaguered" scarcely seems to fit the bill. He's been forced to deny his own imminent demise so many times over the past two years it's hard to keep count, and although yesterday's 40 per cent dividend cut could not have come as a surprise to anyone, it will have the company's army of small German investors baying for blood all over again.

Deutsche Telekom was the privatisation that was meant to turn Germany into a nation of stockholders. The reality is that it has made Germans more averse to the cult of equity than ever. Since their peak, the shares have plunged nearly 90 per cent and although Mr Sommer cannot be held wholly to blame for the great telecoms meltdown, he was one of the main culprits in profligate use of his shareholders money at the height of the boom. Mr Sommer's greatest folly was the €48bn acquisition of Voicestream, the US mobile phones company, but in his dash to go global, there were many lesser examples of the same thing.

If Deutsche has so far avoided the humiliation of a rescue rights issue, that's only because it has been more successful than British Telecom at defending its domestic monopoly. As it is, the company is reconciled to a downgrade on its debt, which will trigger higher interest charges. Still smarting from the Germany Cartel Office's refusal to allow the €5.5bn sale of German cable interests to Liberty Media, and forced by market conditions to delay the planned IPO of T-Mobile, Deutsche Telekom is being forced significantly to scale back its targets for debt reduction and slash plans for capital spending.

In any normal business, Mr Sommer would by now have been punished for his mistakes by being thrown overboard, but not at Deutsche Telekom, which is still 43 per cent owned by the German government. As long as Gerhard Schröder, the German Chancellor, stands full square behind Mr Sommer, he's safe. Deutsche has been a good deal more effective in delivering broadband to Germany than BT has to Britain, and that may be one reason for Mr Sommer's survival. But it's a thin thread that separates him from oblivion.

Amey and PPP

Just when you thought it was safe to start believing in public private partnerships again, along comes Amey to throw some blood-red meat to the sharks. Stephen Byers has done more than most to undermine the initiative's credibility in the eyes of investors. Now Amey, one of the biggest PPP contractors in the country, has left us wondering if they are capable of making any money at all.

The £56m profit Amey planned to book last year on all those nice fat hospital and road contracts has unexpectedly turned into an £18m loss thanks to new accounting standards which have the double effect of making costs higher and revenues lower.

In these post-Enron days you cannot be too careful. The extent to which companies are now having to adjust reported profits to conform with the latest accounting standards is a sign of the times. Amey has the "Urgent Issues Task Force" and its deadly "Information Sheet 51" to thank for the plunge in its share price yesterday. This decrees that PFI contractors must write off their bid costs as they go along rather than capitalising them.

They must also smooth reported revenues more evenly over the early years of contracts to reflect the higher risks faced in the initial stages. Amey has owned up to overstating its profits by some £63m in the last three years and its example is certain to be followed by Jarvis and others that are capitalising on the PPP.

The new accounting standard is only in draft guidance form at the moment. But Amey's chief executive Brian Staples took the view that it would come into force sooner or later, so why not take it on the chin now. Even so, it was small wonder the shares reacted so negatively. The stock market was almost totally unprepared for this bombshell. Tony Blair, who is such a fan of the PPPs, has yet to give a plausible explanation of what purpose they serve other than to keep government spending off the balance sheet. Amey has just sown a little more doubt.

j.warner@independent.co.uk

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