It's been eight months since KPMG Consulting first filed for what it hoped would be a billion-dollar-plus initial public offering. Then, its upstart competitors like Scient (SCNT:Nasdaq - news - boards) and Lante (LNTE:Nasdaq - news - boards) still had sky-high valuations and growth rates, and it seemed like a no-brainer for McLean, Va.-based KPMG to cash in on the good times. Never mind that KPMG's is a people-intensive business with untechlike margins, a thesis that appeared here in May. There was money to be made.

Things have changed a bit, of course. Shares in Scient and Lante alone are down 94% and 91%, respectively, and KPMG has broadly shaved its own valuation. But the giant consulting firm cleaved from one of the remaining Big Five accountancies is moving ahead anyway with its IPO. The firm is on the road now, pitching its gargantuan $1.9 billion share offering to institutional investors. Its goals are significantly reduced, but investors still should consider who stands to benefit most from the offering. There's only one clear answer to that question: the partners of auditing firm KPMG, who will rake in about $1.5 billion of that offering, with the balance going to KPMG partner Cisco Systems (CSCO:Nasdaq - news - boards) so the latter can reduce its stake in the consulting firm.

The stakes in the KPMG Consulting IPO are high. Lead investment bankers Morgan Stanley Dean Witter (MWD:NYSE - news - boards) obviously will be champing at the bit to make such a large offering. But KPMG competitors Accenture (the former Andersen Consulting), PricewaterhouseCoopers and Deloitte Consulting will be watching the offering just as carefully. If 1999 was the year of the e-consultant, the established firms are hoping 2001 will be the year of the old consultants.

And so, despite the warning signs -- puny gross margins of about 25%; recent year-over-year growth rates of 29%, lower than the 34% the firm has averaged since 1996; the entire proceeds of the IPO going to existing shareholders, not the firm -- KPMG will attempt to keep hope alive for itself and others who watched with envy as the upstarts theoretically got rich two years ago.

"I personally would never invest in any of these companies," says Tom Rodenhauser, president of Consulting Information Services, a Keene, N.H., newsletter publisher and adviser to corporations that purchase consulting services. "You're dealing with people and cyclical businesses. But when you look at KPMG, relative to other companies, they really have a more sustainable business. If KPMG comes out and does it right, it paves the way for Accenture. They're going public; it's just a matter of time."

(A spokesman for Accenture says that the firm's partners plan to meet in April to consider its IPO plans. In the old days of the late 1990s, Accenture's massive, ongoing image-advertising campaign would be considered a classic instance of building the valuation before an eventual filing.)

To be sure, KPMG is one of the class acts of the industry, and its prime competitors include current and former consulting arms of the Big Five auditors as well as IBM's Global Services outfit, whose performance has been strong of late.

Rodenhauser says he recently attended a briefing for industry analysts at which KPMG said that its client pipeline for the third quarter of 2001 will be $6 billion. Rodenhauser points out that KPMG often captures 25% of such business, meaning it could realize revenue of $1.5 billion. The firm recently disclosed that it expects fourth-quarter revenue to be between $695 million and $705 million. (It's odd that KPMG was briefing anyone on financial metrics before its roadshow began. A spokesman confirmed the meeting but said the backlog information wasn't included. He declined to make available documents from the briefing, which he termed typical of nonfinancial presentations to industry analysts.)

For all this, the opportunistic investor will recognize that the partners of KPMG and their pals at Cisco have priced this one to move. At a presumed valuation of roughly one times annualized sales, KPMG Consulting is offering its shares for between a third and a half what its peer group have valued their businesses.

"It's a huge discount to precedent deals," says Greg Gore, who follows consulting firms for investment boutique W.R. Hambrecht in San Francisco. Gore estimates that Cap Gemini bought Ernst & Young Consulting Services for about 2.8 times its revenues and Hewlett-Packard (HWP:NYSE - news - boards) was interested in paying as much as three times sales for PricewaterhouseCoopers. "If there's a real business here, it's a steal for investors."

Of course, one wonders why the partners at KPMG and Cisco would be so eager to unload. Cisco wants to reduce its holdings to below 10%, which lowers its reporting requirements. But when Cisco invested $1.05 billion for just under a 20% stake, that implied a valuation of $5 billion for KPMG Consulting. Now that valuation, based on the midrange of the firm's $16-$18 proposed pricing, is about $2.6 billion.

Could the sellers be desperate because comparable valuations were awarded during the long economic expansion, and the partners know that anything close to that valuation in the face of an economic slowdown is foolish?

Remember this. An IPO used to be considered a capital-raising event, not simply an effort for existing shareholders to cash out. KPMG Consulting says that by paying off some of its debt to KPMG Inc., it cleans up its balance sheet, which is a form of raising capital. The offering also gives the firm a currency for acquisitions. The bottom line, however, is that the event serves to fatten individual wallets rather than building up coffers for the firm.

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