EY’s plan that could radically shake up the Big Four

One interview to start: The head of Qualcomm told our colleagues that the US chipmaker wants to buy a stake in UK chip designer Arm alongside its rivals and create a consortium that would maintain Arm’s neutrality in the semiconductor market.

In today’s newsletter:

• EY considers a historic split

• Broadcom’s whirlwind VMware takeover

• The Davos crowd debates ESG

EY goes from M&A adviser to advisee

EY’s revenues hit a record $40bn last year after clients flocked to professional services firms for advice on pandemic-driven deals and corporate shake-ups.

Now the Big Four accounting firm is plotting a transformative deal of its own. EY’s most senior partners are in talks about a historic split of the 312,000-person firm’s audit and advisory businesses, in a move that could transform the Big Four.

Goldman Sachs and JPMorgan Chase are advising on the plans, which include a possible public listing or partial sale of its global advisory business, the FT’s Michael O’Dwyer and DD’s Arash Massoudi revealed, though EY insisted “no decisions have been made”.

EY, whose previous audits of Germany’s Wirecard, London-listed NMC Health and Luckin Coffee in China have gone less than smoothly, had previously argued that breaking up the Big Four is not the solution to concerns over poor audit quality and a lack of competition.

But continued investment in improving audits has failed to quell criticism, and a clampdown on carrying out advisory work for audit clients has dragged on EY’s consulting, deals and tax advisory practices.

There are plenty of hurdles to jump before any split can go through. Partners’ interests differ depending on their age, region and business line. Deciding what value to allocate to each business will be key, according to EY’s competitors.

In the meantime, rivals are circling for unsettled employees who may fear that partners are selling the family silver in return for a lucrative one-off payday.

But if the split goes ahead, it would force the rest of the Big Four — Deloitte, KPMG and PwC — to decide whether to follow suit or stick with their current model and risk their peers stealing a march.

Private equity interest in the sector means they may find it hard to resist cashing in.

“I would imagine this will lead to a mass of activity,” says a UK partner at a rival firm, recalling a spate of spin-offs by auditors two decades ago, which included EY’s sale of its consulting business to Capgemini in 2000 before it rebuilt the practice.

The partner recalled executives catching transatlantic flights on the Concorde supersonic airliner — which stopped flying in 2003 — to thrash out the last round of accounting break-ups.

EY’s global chief Carmine Di Sibio does not have the option of crossing the Atlantic in two hours should he need to. But he can still call on EY One, the firm’s private Bombardier jet, if crunch talks are needed to land the break-up.

The billionaire power duo behind Broadcom’s VMware takeover

Broadcom’s $69.1bn takeover of software group VMware drew in an army of advisers from eight banks and four law firms.

In the end, though, it all came down to two billionaires bent on clinching one of the world’s largest technology deals on record: Broadcom’s Hock Tan and Michael Dell of the eponymous PC maker, whose M&A coups outnumber those of many Wall Street veterans.

The duo pushed the transaction — codenamed “Project Atlas” — over the line with remarkable speed. “Tan reached Michael Dell two weeks ago” a person with direct knowledge told DD’s Antoine Gara and DD’s James Fontanella-Khan. “A lot of the stuff was done principal-to-principal, the banks weren’t necessarily included.”

Bankers from Barclays, Bank of America, Citigroup, Morgan Stanley, Credit Suisse and Wells Fargo were brought in several days later to help Tan cobble together $32bn to finance the deal, with Goldman and JPMorgan advising VMware.

Advisers referred to VMware as Verona, after the Italian city that was the setting of Romeo and Juliet, and Broadcom as Barcelona, the Catalan capital. Still, word leaked of a potential acquisition, forcing Tan and Dell to close the transaction faster than they had hoped.

Acquiring VMware, the crown jewel asset acquired by Dell and his dealmaking partner Egon Durban of Silver Lake, is Tan’s biggest bet.

The Broadcom chief, who forged a reputation as one of the chip industry’s most relentless consolidators, has recently shifted his acquisition spree towards the software sector after taking heat from regulators and his rivals, scooping up CA Technologies in 2018 and Symantec in 2019.

Dell and Silver Lake, which could receive as much as $15bn in cash combined from Broadcom, are not completely exiting the business. The potentially 50 per cent stock component of the merger, designed to protect Broadcom’s investment-grade debt rating, puts them on course to enjoy the potential upside of Tan’s plan to integrate VMware into his broader portfolio.

Tan is confident in his ability to nearly double the profitability of VMware, which has proven valuable by reviving Dell’s PC business.

One of his most pressing challenges will be to keep antitrust regulators at bay. They are likely to be interested in whether Broadcom will leverage its expanded market share to demand exclusivity from clients for its software and hardware offerings.

The ESG pendulum swings the other way

Last week DD joined the hordes of financiers and Hollywood stars that descended upon the Swiss town of Davos. The consensus among business leaders was unilaterally gloomy.

There was one thing the crowd could not seem to agree on, however: where ESG falls on the agenda.

Even as the summit’s host Klaus Schwab handed out books declaring the vindication of “stakeholder capitalism” and attendees shuffled between panels on cutting carbon emissions to cocktail parties promoting UN sustainable development goals, many Davos delegates remained unconvinced that progress has been made.

The sustainable investing trend has been increasingly under attack from populist politicians and industry sceptics, the FT’s Andrew Edgecliffe-Johnson reports in this Big Read.

The Alpine resort town has come to host a curious blend of corporate elites and social activists — a place where billionaires who arrived via private jet can rub shoulders with activists such as Greta Thunberg.

That dichotomy has grown more pronounced as of late, even as the ESG movement has roused what McKinsey consultants call “the largest reallocation of capital in human history”. Backlash has been stirring from groups such as the Free Enterprise Project, which says it is trying to save corporate America from “the socialist foundations of woke”.

“I’m really afraid that too much of it is lip service . . . ESG has become too much of a check-the-box asset class,” says Lady Lynn Forester de Rothschild, who runs an influential group of stakeholder-focused chief executives.

If the growing opposition has its way, some companies will have fewer boxes to check.

Job moves

• UK estate agent Foxtons has named Guy Gittins, the former boss of rival agency Chestertons, as its new chief executive as it seeks to address shareholder concerns about high pay and poor performance.

• AGL Energy’s chair Peter Botten and CEO Graeme Hunt have resigned after tech billionaire and climate activist Mike Cannon-Brookes bought shares in the Australian group in an effort to block a pending demerger plan.

• Squire Patton Boggs has appointed private equity lawyer Maxime Dequesne as a partner in Paris. She joins from French private equity boutique Lamartine Conseil.

Smart reads

Banking on victory Hungary’s prime minister Viktor Orbán has long sought a three-way merger between the nation’s largest banks to boost his political power. After winning his fourth consecutive term, the risky plan is finally taking shape, the FT reports.

SeaWorld’s new captain The Orlando theme park was adrift in a sea of bad publicity. Until the New York investment firm Hill Path Capital and its no-nonsense founder, the Goldman and Apollo alum Scott Ross intervened, the Wall Street Journal writes.

Inflated expectations Private equity managers have expressed confidence that the current reckoning in public markets will send more clients their way. The outlook could “prove to be too much bravado”, economist Mohamed El-Erian argues via FT Opinion.

News round-up

Klarna boss puts brave face on buy now, pay later problems (FT)

SoftBank cuts top executives’ pay after Vision Fund posts record loss (FT)

Skadden and the industry mourn death of M&A icon Scott Simpson (Legal Business)

US investor launches £1.5bn bid for Countryside (FT)

Twitter refuses to remove Silver Lake’s Egon Durban from board (FT)

Singapore’s sovereign wealth fund swoops for £3.3bn UK student housing deal (FT)

Robert Smith’s Vista Equity snags early $9bn for new fund (Bloomberg)

Telecom Italia agrees to merger of fixed network assets with Open Fiber (FT)