Jumping Into Chilly Waters

KPMG Consulting's $2.1 billion IPO won't easily coax others to dive into public market.

History was made last Thursday, when KPMG Consulting (NASDAQ: KCIN) became the first of the Big Five professional-services firms to undertake an initial public offering.

Indeed, KPMG is the first pure consulting giant to take the public plunge.

KPMGs $2.1 billion IPO is the biggest U.S.-based issue since the AT&T Wireless $10.6 billion offering last April.

However, as with other recent historical events, the verdict on KPMGs IPO—and its impact on the market—will be a muddled one. Questions persist on whether the company has the makings of a market thoroughbred.

Also, regardless of the IPOs opening-day success, the chilly economic forecasts still could dampen any hopes for new technology-related IPOs, especially from consulting companies that canceled their jump into the public market last year.

Upside To be sure, KPMG had a strong out-of-the-box performance. The companys stock came to market at $18 and soared 30 percent on Thursday. The impressive debut reinforces the fact that KPMG has successfully distanced itself from struggling e-consulting shops like iXL, Razorfish and Xpedior.

"You wont see KPMG in any growth portfolios, but institutional investors understand the differences [between established firms and e-business startups]," notes Martin Wright, CEO of Emerald Solutions, a Web consultancy that cancelled its IPO last year.

Specifically, says Wright, savvy investors recognize that a full-service consulting operation can be scaled up for greater efficiencies and can deliver solid, sustainable earnings. Whats more, it can accomplish all of that without investing billions of dollars in infrastructure.

Downside Still, no knowledgeable analysts believe that KPMGs successful offering will open an IPO window for small consultancies wishing to go public this year. Specialty e-business shops are monitoring developments at KPMG. But, so far, none plans to alter its own strategy in response. Although all consulting companies compete in the same general arena, says Emerald Solutions Wright, Big Five players and e-biz specialists appeal to entirely different investor constituencies.

"I dont see [the KPMG IPO] having a significant impact on our position," says Marilynne White, VP and general counsel at Logical Design Solutions, a 10-year-old firm that withdrew its planned $45 million IPO last year.

Several other Web consultancies that cancelled their IPOs—like Zefer, which cancelled three times last year—agree with that assessment but are unwilling to comment on the record. A spokes- man at one e-business integrator explains that his firm is still licking its wounds from last years aborted IPO.

"Frankly, we have talked too much about the subject already," the spokesman says. "Its time for us to move on to a new story."

Two to Watch David Sturtz, an analyst at Credit Suisse First Boston, expects, at most, that only two other consultancies will mount IPOs this year, and both of them are Big Five firms—Accenture (formerly Andersen Consulting) and PricewaterhouseCoopers.

Yet another industry analyst, who requested anonymity, says any consultancy wishing to follow in KPMGs footsteps would have to show a "clear path to profitability within a quarter, or maybe two." The small shops that withdrew their IPOs in last years meltdown, by contrast, "face degenerating business," he concludes.

Nevertheless, this analyst does see the potential for a successful KPMG IPO to crack open the window for new offerings in general.

Meanwhile, there are serious questions about the prospects of KPMG in the public domain. One major concern is cash flow. George Nichols of Morningstar.com notes that despite its good earnings, KPMG has only $20 million in cash and needs to be "more vigilant" about collecting customer payments promptly.

Movin Out Another negative is an employee turnover rate of nearly 27 percent for the last six months of 2000, which suggests that KPMG may not be paying its top consultants enough to keep them on board. Its rare to have such a high turnover rate on the eve of an IPO, seeing that many company insiders stand to profit from such an offering.

Other potential problems include KPMGs close ties to Cisco Systems, which just issued its first negative earnings announcement in years. The Cisco agreement bars KPMG Consulting from pushing networking wares from Lucent Technologies and Nortel Networks. If Ciscos product strategy stumbles, KPMG could take a fall.

Also, after the IPO is completed and the $2.1 billion is parceled out to Cisco and former parent company, KPMG International, there will be precious little money left to actually run KPMG Consultings business.

And, finally, some observers have doubts about KPMGs long-term strategy. Ritu Raj, the CEO of Avasta, an Internet infrastructure provider that partners closely with other Big Five consultancies, says KPMG has failed to articulate its "mission in life."

A one-time high-end strategy firm, KPMG now operates closer to the commodity level, via its Win2K alliance with Microsoft and its preferred provider pact with Cisco. "Investors may wonder exactly what theyre buying," he says.