A partnership in a Big Five accounting firm over the years has been as cozy a professional home as anyone could wish for. Those who made partner were paid hundreds of thousands of dollars a year, could retire relatively young, and even amid the industry's many mergers could count on job security.But the partners in Arthur Andersen's United States practice see all that evaporating.
Regardless of whether Andersen can arrange a rescue by another Big Five firm, partners can expect to lose the equity they have paid into the firm hundreds of thousands of dollars each. Andersen partners have typically relied on that money in retirement to bolster their savings, and the firm's pensions are small by industry standards.
If they simply try to withdraw and join other firms, either individually or in groups, the partners run the risk of being sued for stripping a collapsing firm of money that might otherwise be available to pay claims from investors in Enron , whose books Andersen audited.
And so, many Andersen partners are eager to achieve what is so far eluding the firm a fresh start under the auspices of one of their giant competitors, with the opportunity to build new equity while limiting their liability to the cash they left behind.
"There has to be some kind of firewall around the legal liability," said Mark W. Dirsmith, a professor of accounting at the Smeal College of Business at Pennsylvania State University.
Andersen partners are paid out of the firm's profits based on a complex formula; they pay a fraction of their earnings back each year, building up equity and covering the firm's operating costs.
According to one former partner, when partners retire they receive their equity investment back over a period of 10 years. But with the collapse of Enron, so many individuals, companies and institutions have claims against Andersen's capital that partners are unlikely to be able to take their investments out of the firm without running the risk of lawsuits.
A merger would allow Andersen partners to join a new partnership and build up equity in it, another former Andersen partner noted. Assuming that the Andersen refugees would have to buy into the new partnership, their arrival would not dilute ownership of the acquiring firm, he said.
Important matters that Andersen partners would have to negotiate, he added, are how much the acquiring firm would require them to invest, how quickly they would have to invest it, and whether they would ever receive any payment to make up for their lost equity in Andersen.
"The one thing you never do in a merger is pay off the individual partners" too soon, this former Andersen partner said. "What you don't want to do is make them rich too quickly. You want them to continue working."
Of course, another firm could make whatever accommodations it chose to lure or retain Andersen partners with particular expertise or clientele. And having lost their equity in Andersen, individual partners might set out to make their own deals, rather than loyally participating in any merger the firm succeeded in negotiating. Indeed, some partners have already left.
Most Andersen employees do not have equity in the firm and are paid salaries. An acquiring firm would normally take on such Andersen obligations for at least a year or so, lawyers said, before eliminating overlapping employees and offices, probably through layoffs.
The dwindling of accounting's Big Eight firms to the current Big Five over the last decade has given the industry a lot of experience in mergers not all of it smooth.
A merger of two large professional services firms is not an easy task, said David E. Greene, chairman of the systems and accounting program at the Kelley School of Business at Indiana University.
"You've got cultural differences; you've got different ways of operating; you've got real estate issues that are seemingly always thorny; and all of those are true even without the overhang in this situation," he said. "You're not merging businesses, you're merging people, and that's always a difficult thing to do."
It has taken years for Price Waterhouse and Coopers & Lybrand to effect their merger, Professor Greene said, and some former employees of the two firms who are critics of the combination say the process is still not complete.
A transaction involving Andersen would be complicated by the firm's lack of negotiating power, he said. In past deals, each merger partner retained control in those markets that it previously dominated; in an Andersen deal, the acquirer may be better able to dictate terms, Professor Greene said.
The crucial matter, he added, would be for Andersen to move quickly.
"You're trying to do so much at the same time," he said, "because you want the employees to stay with the merged firm."