EY cuts costs to boost profits ahead of planned spin-off

EY has begun cutting costs to boost profits next year, as it seeks to maximise the valuation of its consulting division ahead of a planned spin-off and public listing of the business.

Hiring, travel for internal events, training and staff Christmas parties have been targeted as part of efforts to curb expenses at the audit and consulting firm ahead of the break-up known as “Project Everest”, people familiar with the matter told the Financial Times.

“There’s a huge clampdown on expenses at the moment to make the numbers for Everest valuation look good,” said one of the people at EY’s UK operations, who said the firm’s bosses had cited “economic conditions” for the cuts.

The 365,000-person firm is aiming to ballot partners on the split as soon as March or April after a series of delays hammering out the details of the break-up. If approved, executives would aim to spin off the consulting and most of the tax business and list the new company on the stock exchange while the audit business would retain the EY name and attempt to rebuild its advisory arm.

EY’s US business also referred to the economic outlook this month as it cancelled staff holiday bonuses. High inflation has increased costs while a darkening economic picture could squeeze clients’ consulting budgets.

The UK business decided against funding large staff Christmas parties this year, according to three people working there.

Team leaders told staff this was about “EY trying to make itself look as profitable as possible [in order to be] ready for the split”, said one of the people. The other two said some senior partners had denied the cancellations of the Christmas parties were linked to the break-up plan and cited the fact that the firm had already held large parties this summer.

EY’s global executives are also trying to balance “tension” between investing in the business and the short-term incentives pushing national member firms to cut costs in order to lift their valuations, said people with knowledge of the matter.

EY is structured as a network of partnerships in 150 countries, which retain most of their profits locally and pay a fee to the global operation for use of the brand and shared technology.

Local firms want to maximise their profits in the financial year ending June 2023, which will affect the valuation of the consulting business and how much of the proceeds are allocated to each country. But failure to invest could hamper the business in the longer term.

The Big Four firm is also exploring whether to force partners to reinvest their cash windfalls from the spin-off as it seeks to counter concerns that the separation risks weakening the audit business, said people familiar with the matter.

The flotation of the consulting business would raise about $30bn in debt and equity.

Consulting partners would be given shares in the new company while much of the cash raised would be used to hand audit partners payments of two to four times their annual earnings to compensate them for losing their stakes in the advisory business.

National member firms will have wide latitude to decide how much, if any, of the cash must be reinvested in the audit firm, said one of the people familiar with the matter. The firm already planned to use some of the funds to pay off debt.

Capital reinvestment was “a lever that we can pull” to address an impression in some quarters, including some regulators in Washington, that the spin-off would enrich partners but would not prioritise investment in the audit firm, the person added.

Executives have faced concerns from some current and former partners about the financial strength and resources of the audit business, which will retain part of the tax practice.

Others have questioned whether multimillion-pound cash windfalls would prompt some audit partners to accelerate their retirement.

EY bosses in the UK have told staff in recent weeks that they were “still working on an answer” to the risk of an exodus, said one of the people at the firm.

However, the payouts would not be big enough to allow younger partners to retire, said another person at the firm. Decisions about the windfalls have not been finalised.

EY declined to comment. It has insisted the break-up would not threaten audit quality and would allow both businesses to grow more quickly by liberating them from conflict of interest rules that restrict consultants from working with audit clients.

Global boss Carmine Di Sibio told staff this month that the split was modelled in “different times” and that markets had changed significantly since the plan became public in May but that the break-up was still the best strategy.