PricewaterhouseCoopers Consulting Unit Files for IPO

Updated from 3:06 p.m. EDT

Following through on plans announced in January, PwCC Ltd., the consulting division of PriceWaterhouseCoopers, filed with regulators for an initial public offering covering an estimated $1 billion of its shares.

The only underwriter listed on the deal was Morgan Stanley, according to a brief Securities and Exchange Commission filing. No other information about the offering was provided.

PwCC's IPO comes amid serious scrutiny over accounting firms' potentially conflicting relationships with their consulting units in the wake of energy trader Enron's bankruptcy. Arthur Andersen, now the subject of a Justice Department investigation, offered extensive consulting services to Enron at the same time it was auditing their books.

PriceWaterhouseCoopers had been planning the IPO of its consulting arm for more than two years, but sped up the process to avoid being tainted by the scandal surrounding Andersen.

After the IPO of PwCC, Deloitte & Touche and Arthur Andersen -- which retained its own $2 billion consulting unit after the August 2000 spinoff of Accenture (ACN Quote - Cramer on ACN - Stock Picks) -- will be the only two members of the Big 5 accounting firms with in-house consulting divisions. Ernst & Young sold its consulting business to Cap Gemini, while KPMG Consulting (KCIN Quote - Cramer on KCIN - Stock Picks) made its IPO debut last year.

Stung by an ongoing SEC investigation during 1999 and 2000 into independence issues and desiring to avoid further regulatory criticism, PriceWaterhouseCoopers announced in February 2000 plans to spin off its consulting business.

"The SEC investigation had weakened the company's standing on regulatory issues, so it was less inclined than some of the other accounting firms to fight the SEC on the issue of splitting off consulting," said Ashish Nanda, an associate professor at Harvard Business School.

In November 2000, PriceWaterhouseCoopers failed in an attempt to sell its consulting division to Hewlett-Packard (HWP Quote - Cramer on HWP - Stock Picks) for $18 billion.

"News of the proposed sale made it clear that PriceWaterhouseCooopers viewed the future of the company as having separate consulting and accounting businesses," Nanda said.

Now, with Arthur Andersen's fall from grace, it seems almost inevitable that the industry will make the break between accounting and consulting. Beyond the conflict of interest problem, Nanda said there are strategic and cultural reasons behind why splitting up the businesses makes sense.

Strategically, consulting businesses often enter into long-term nonexclusive contracts with clients and may take payment in the form of equity in clients. Consulting divisions of accounting firms are prohibited from taking such actions. Culturally, "accountants characterize consultants as 'empty suits,' and consultants describe accountants as 'bean counters,'" he said. "Running the two businesses together causes cultural problems and leads to organizational diseconomies."

Nevertheless, PwCC's offering will face challenges, other analysts said.

"Public ownership in the consulting industry is still an anomaly," said Tom Rodenhauser, president of Consulting Information Services, an independent research firm. "The volatility of earnings for consulting businesses does not make for a good public company in the eyes of investors."