Cap Gemini buys Ernst & Young consultancy arm

Management consultancy and systems integrator Cap Gemini has agreed to acquire most of Ernst & Young's consultancy arm in a deal which makes the combined company a top five global player.

Based on combined 1999 revenue of about 7.8bn euros (£4.8bn), the new group will be the world's fifth largest IT and consulting group behind IBM, EDS, Computer Sciences Corporation and Andersen Consulting.

Cap Gemini will issue up to 43.5 million shares to Ernst & Young partners and pay 375m euros in cash, largely to cover anticipated tax liabilities that will arise from the 11bn euro deal.

The terms of the merger are complex and initially cover Ernst & Young's consultancy businesses in the US, Canada, the UK, Germany, France, Spain and Italy. These represent about 88 per cent of Ernst & Young's global business. Other countries, principally in Benelux and the Nordic region, are expected to be brought into the fold in the coming weeks.

Cap Gemini shareholders and Ernst & Young partners will need to approve the deal, which is expected to be concluded by June.

Geoff Unwin, a senior vice president at Cap Gemini, said: "This is a revenue-driven deal and it will not lead to redundancies."

The announcement is expected to trigger a rash of activity at PricewaterhouseCoopers, KPMG and Deloitte and Touche, all of whom have large audit practices operating alongside their consultancy divisions.

These companies have all shown high growth in the last decade, largely fuelled by IT-related work. But accounting units could suffer from top employees being lured by more profitable careers in consulting if a separation between accounting and consultancy is forced upon them.

Bruce Richardson, senior vice president at AMR Research, said the deal gives Cap Gemini a credible presence in the US market.

"In the past Cap Gemini has not been considered a global player by vendors and the deal will significantly enhance its reputation," he said. "It should bode well for customers."