The French computer services company Cap Gemini Group and Ernst & Young Consulting have reached an agreement to merge in a deal that would create a powerhouse provider of technology services to the financial industry.
The deal, which could be valued as high as $11.3 billion in cash and stock, would give Ernst & Young's partners 36% ownership of Cap Gemini. The Paris-based company would issue as much as 43.5 million shares of stock and pay $375 million in cash to fund the deal if all Ernst & Young Consulting partners agree to the terms.
Mike Meyer, chief executive officer of Cap Gemini America, said discussions began informally more than a year ago. Though Cap Gemini is a dominant provider of technology and consulting services in the European market, it did not have as solid a footing in the United States.
"In the U.S., frankly, we have been a mid-tier player," Mr. Meyer said. "We are capable of doing an awful lot of good work, but we are not viewed as one of the major players."
Cap Gemini would acquire most of Ernst & Young's consulting business, which includes 18,000 people globally producing $3.3 billion in 1999 revenues. Cap Gemini and its 40,000 employees in 20 countries has yearly revenues of about $4.4 billion. Cap Gemini America Inc. has about 3,000 employees and had $638 million in 1998 revenues.
Cap Gemini and Ernst & Young Consulting derive 23% and 19%, respectively, of total revenues from their financial services clients. The company would be a "formidable competitor" to large consulting firms, systems integrators, and outsourcers such as International Business Machines and Electronic Data Systems, said Lawrence A. Willis, an executive vice president at First Manhattan Consulting in New York.
The banking industry would benefit from the deal from a number of perspectives, Mr. Willis said. It would open Ernst & Young's practice to banks and corporations that were reluctant to hire Ernst & Young accounting services in the wake of the Securities and Exchange Commission's recent comments on independence issues in the accounting industry.
Among the SEC's findings, released in early January after a yearlong review, was that half of PriceWaterhouseCooper's 2,700 partners owned investments in corporate audit clients, a violation of SEC independence rules.
Mr. Willis said Ernst & Young is the first of the large five accounting firms to announce its intention to sell its consulting practice, but Arthur Andersen was the first to create more of a separation between its auditing and consulting practices.
Andersen Consulting was spun off into a legally separate partnership a number of years ago. Since then it has been engaged in a public battle for a more formal separation.
"That is quite a battle and it is still pending," Mr. Willis said.