EY Breakup Plan Doomed by Miscalculations and Powerful Opponents

EY on Tuesday abandoned its plan to break up the 390,000-person firm into separate businesses, one that looked like a traditional auditor and another that focused on consulting. On Wednesday, EY’s top executives pointed fingers, mostly at the U.S. operation, in firmwide calls and expressed fear that the effort had weakened it and encouraged rival firms to poach its staff. 

The firm spent $600 million and more than a year working on the split, executives said on internal webcasts on Wednesday. That tally includes $300 million of payments to a raft of top-tier investment banks and law firms and other outside costs, as well as $300 million of partner time and other costs within the firm. 

Anna Anthony,

a senior executive at EY’s U.K. arm, played down the spending on a call with partners, saying the cost was offset by $400 million that EY saved on projects that were delayed or deferred because of the proposed split.

“People have gone through…frustration, disappointment, fear, anger, that we have not been able to move forward,”

Patrick Winter,

EY’s managing partner of the Asia and Pacific region, said on a call with partners. He added there was also a “sense of embarrassment for each of our partners in how they’re having to deal with this news.”

Some of EY’s overseas leaders warned Wednesday that rivals could recruit its staff amid a broad shortage of auditors. There was also concern that EY’s overseas operations could sell off their consulting businesses on their own. 

“Our competition is going to have a field day with poaching our people,”

Julie Teigland,

the leader of EY’s European region, said on a call with partners. “Clients are really worried that we’re going to lose talent…based on the uncertainty that we’ve had and the infighting.”

Carmine Di Sibio,

EY’s global chairman and chief executive, speaking on an internal webcast asked for a breathing space to let the dust settle. Mr. Di Sibio took much of the responsibility for the failed breakup effort and it isn’t clear how long he will stay at EY.

He launched the breakup plan, dubbed Project Everest, more than a year ago to free EY’s consulting business from conflict-of-interest rules that prevented it from doing business for audit clients. In retrospect, Mr. Di Sibio failed to anticipate the potential U.S. opposition and miscalculated the financial hurdles a deal would face.

The idea was for the consulting firm to raise billions of dollars by borrowing and selling a stake in an initial public offering. The money would go in part to pay the partners who were staying with the auditing firm, while the consultants would get stock in the new firm. 

As the biggest and most influential firm, the U.S. had an effective veto over the deal, which it used to try to extract more concessions for the auditors, before deciding to vote down the plan. 

In the days after the split was announced, Mr. Di Sibio talked about the complexity of getting partners in dozens of countries to approve the deal. EY, like all major accounting firms, is made up of separate partnerships in different countries that are affiliated with each other under the EY brand. Each country has its own governance structure. In the U.S., a two-thirds majority on the executive board was required to approve the deal, giving a small group of partners immense power.

The U.S. was seen as a beneficiary and Mr. Di Sibio had held senior executive positions at the firm before moving up to a global role. 

But a group of influential retired U.S. partners, including former top executives of the firm, quickly banded together to oppose the deal. They said it would weaken the audit business and criticized Mr. Di Sibio, who was in line to become chief executive of the new consulting business. He had been scheduled to retire in June.

The retired partners had a deep interest in the deal because some of the proceeds were intended to fund their pension plan. They also believed a breakup threatened their legacy. The U.S. executive committee rejected the deal on Friday without a full vote of the firm’s U.S. partners. 

The U.S. concern stemmed in part from the worsening economics of the deal. Rising interest rates increased the cost of the billions of dollars in debt the new consulting company was planning to take on, while a near-frozen market for initial public offerings made the proposed public sale of a stake in the business more challenging. A tougher economy has also pressed on profit margins, leading to a round of cost cutting and question marks over the ambitious targets set for the new businesses.

But the fundamental issue that sank the deal was the Americans’ inability to decide how EY’s lucrative tax practice should be divided up, even within the U.S., according to people familiar with the matter.

“The U.S. could not get comfortable with the proposed separation of some of the businesses with the deepest technical expertise like tax,” Hywel Ball, the head of the U.K. firm, told his partners, according to a recording of the webcast reviewed by the Journal. “Both [the U.S. auditing and consulting] businesses felt they needed a tax business with the scale to be considered competitive and this proved irreconcilable.”

Mr. Di Sibio appeared confident of success almost until the end, saying as recently as February that he saw “no tremendous hurdles” to getting the deal done. 

Though there was still internal opposition, the firm’s U.S. executives had joined their overseas colleagues in giving the deal the green light in principle in September. “If they weren’t going to follow through on this, that’s the time they should have stopped it,” one person familiar with the matter said. 

EY’s U.S. leader

Julie Boland

appeared to cement her support for the plan in December by agreeing she would head the new audit focused partnership. That was taken as a sign she could deliver the two-thirds vote needed on her executive committee to approve the split. 

Instead, Ms. Boland has said she saw the September green light as a move from the feasibility to the design stage, rather than a definite go ahead for the plan. “The split and ensuing transaction…was one option, but never the only option to maximize the potential of the firm’s operations,” Ms. Boland and other U.S. executives said in an internal note after the deal failed. 

Some partners have privately questioned why Mr. Di Sibio chose to try to split the firm now, when it has enjoyed a period of record growth that took its global revenue to $45 billion in the year through June. Regulators have for years raised concerns about the risk to auditor independence from having consulting services as part of the same firm, but there are no signs any of the firms will be forced to separate.

Mr. Di Sibio has also been criticized by some within the firm for overseeing the planned split while also planning to lead the new consulting company, and get a payout worth tens of millions of dollars. 

He wasn’t alone in pushing the plan, however. Other senior EY executives also strongly backed the move and it isn’t clear what they will do next. When the U.S. concerns earlier this year threatened to derail the deal, one contingency plan involved selling at least some of the non-U.S. consulting business, likely to a private equity buyer.

There are also question marks over the future of Ms. Boland. She had taken over the U.S. firm shortly before the breakup plan was begun. She is the daughter of a retired EY partner, and held talks with the U.S. retired partners about their concerns. 

Typically, Mr. Di Sibio’s replacement would come from the U.S. firm, but it is unlikely that angry non-U.S. partners would back a candidacy from Ms. Boland. That could leave a power vacuum at the top as the firm tries to move ahead.

Write to Jean Eaglesham at [email protected], Alexander Saeedy at [email protected] and Mark Maurer at [email protected]

EY on Tuesday abandoned its plan to break up the 390,000-person firm into separate businesses, one that looked like a traditional auditor and another that focused on consulting. On Wednesday, EY’s top executives pointed fingers, mostly at the U.S. operation, in firmwide calls and expressed fear that the effort had weakened it and encouraged rival firms to poach its staff. 

The firm spent $600 million and more than a year working on the split, executives said on internal webcasts on Wednesday. That tally includes $300 million of payments to a raft of top-tier investment banks and law firms and other outside costs, as well as $300 million of partner time and other costs within the firm. 

Anna Anthony,

a senior executive at EY’s U.K. arm, played down the spending on a call with partners, saying the cost was offset by $400 million that EY saved on projects that were delayed or deferred because of the proposed split.

“People have gone through…frustration, disappointment, fear, anger, that we have not been able to move forward,”

Patrick Winter,

EY’s managing partner of the Asia and Pacific region, said on a call with partners. He added there was also a “sense of embarrassment for each of our partners in how they’re having to deal with this news.”

Some of EY’s overseas leaders warned Wednesday that rivals could recruit its staff amid a broad shortage of auditors. There was also concern that EY’s overseas operations could sell off their consulting businesses on their own. 

“Our competition is going to have a field day with poaching our people,”

Julie Teigland,

the leader of EY’s European region, said on a call with partners. “Clients are really worried that we’re going to lose talent…based on the uncertainty that we’ve had and the infighting.”

Carmine Di Sibio,

EY’s global chairman and chief executive, speaking on an internal webcast asked for a breathing space to let the dust settle. Mr. Di Sibio took much of the responsibility for the failed breakup effort and it isn’t clear how long he will stay at EY.

He launched the breakup plan, dubbed Project Everest, more than a year ago to free EY’s consulting business from conflict-of-interest rules that prevented it from doing business for audit clients. In retrospect, Mr. Di Sibio failed to anticipate the potential U.S. opposition and miscalculated the financial hurdles a deal would face.

The idea was for the consulting firm to raise billions of dollars by borrowing and selling a stake in an initial public offering. The money would go in part to pay the partners who were staying with the auditing firm, while the consultants would get stock in the new firm. 

As the biggest and most influential firm, the U.S. had an effective veto over the deal, which it used to try to extract more concessions for the auditors, before deciding to vote down the plan. 

In the days after the split was announced, Mr. Di Sibio talked about the complexity of getting partners in dozens of countries to approve the deal. EY, like all major accounting firms, is made up of separate partnerships in different countries that are affiliated with each other under the EY brand. Each country has its own governance structure. In the U.S., a two-thirds majority on the executive board was required to approve the deal, giving a small group of partners immense power.

The U.S. was seen as a beneficiary and Mr. Di Sibio had held senior executive positions at the firm before moving up to a global role. 

But a group of influential retired U.S. partners, including former top executives of the firm, quickly banded together to oppose the deal. They said it would weaken the audit business and criticized Mr. Di Sibio, who was in line to become chief executive of the new consulting business. He had been scheduled to retire in June.

The retired partners had a deep interest in the deal because some of the proceeds were intended to fund their pension plan. They also believed a breakup threatened their legacy. The U.S. executive committee rejected the deal on Friday without a full vote of the firm’s U.S. partners. 

The U.S. concern stemmed in part from the worsening economics of the deal. Rising interest rates increased the cost of the billions of dollars in debt the new consulting company was planning to take on, while a near-frozen market for initial public offerings made the proposed public sale of a stake in the business more challenging. A tougher economy has also pressed on profit margins, leading to a round of cost cutting and question marks over the ambitious targets set for the new businesses.

But the fundamental issue that sank the deal was the Americans’ inability to decide how EY’s lucrative tax practice should be divided up, even within the U.S., according to people familiar with the matter.

“The U.S. could not get comfortable with the proposed separation of some of the businesses with the deepest technical expertise like tax,” Hywel Ball, the head of the U.K. firm, told his partners, according to a recording of the webcast reviewed by the Journal. “Both [the U.S. auditing and consulting] businesses felt they needed a tax business with the scale to be considered competitive and this proved irreconcilable.”

Mr. Di Sibio appeared confident of success almost until the end, saying as recently as February that he saw “no tremendous hurdles” to getting the deal done. 

Though there was still internal opposition, the firm’s U.S. executives had joined their overseas colleagues in giving the deal the green light in principle in September. “If they weren’t going to follow through on this, that’s the time they should have stopped it,” one person familiar with the matter said. 

EY’s U.S. leader

Julie Boland

appeared to cement her support for the plan in December by agreeing she would head the new audit focused partnership. That was taken as a sign she could deliver the two-thirds vote needed on her executive committee to approve the split. 

Instead, Ms. Boland has said she saw the September green light as a move from the feasibility to the design stage, rather than a definite go ahead for the plan. “The split and ensuing transaction…was one option, but never the only option to maximize the potential of the firm’s operations,” Ms. Boland and other U.S. executives said in an internal note after the deal failed. 

Some partners have privately questioned why Mr. Di Sibio chose to try to split the firm now, when it has enjoyed a period of record growth that took its global revenue to $45 billion in the year through June. Regulators have for years raised concerns about the risk to auditor independence from having consulting services as part of the same firm, but there are no signs any of the firms will be forced to separate.

Mr. Di Sibio has also been criticized by some within the firm for overseeing the planned split while also planning to lead the new consulting company, and get a payout worth tens of millions of dollars. 

He wasn’t alone in pushing the plan, however. Other senior EY executives also strongly backed the move and it isn’t clear what they will do next. When the U.S. concerns earlier this year threatened to derail the deal, one contingency plan involved selling at least some of the non-U.S. consulting business, likely to a private equity buyer.

There are also question marks over the future of Ms. Boland. She had taken over the U.S. firm shortly before the breakup plan was begun. She is the daughter of a retired EY partner, and held talks with the U.S. retired partners about their concerns. 

Typically, Mr. Di Sibio’s replacement would come from the U.S. firm, but it is unlikely that angry non-U.S. partners would back a candidacy from Ms. Boland. That could leave a power vacuum at the top as the firm tries to move ahead.

Write to Jean Eaglesham at [email protected], Alexander Saeedy at [email protected] and Mark Maurer at [email protected]