Cap Gemini and Ernst & Young confirm talks

Cap Gemini's shares soared on the French stock exchange this week after confirmation it is in discussions to acquire Ernst & Young's management consultancy arm.

Both companies confirmed the talks, Ernst & Young citing the impact of the Internet on the professional services market as one possible reason behind the talks. Neither gave any guidance to progess of the talks.

The combined strengths of Cap Gemini and Ernst & Young would shake up the consultancy and systems integration markets, posing serious competition to the likes of IBM Global Services and EDS.

Ernst & Young is one of the big hitters in international management consultancy. The parent company audits 18.4 per cent of Business Week's Global 1000 companies and its global tax practice is one of the largest in the world. The company's management consulting practice ranks fourth worldwide with more than 15,500 consultants.

Ernst & Young had a rocky time in the early 1990s when it was beset by expensive litigation and potential collapse, but by the late 90s it was back on top. It planned to merge with KPMG in the wake of the merger between Coopers & Lybrand and Price Waterhouse, but that was abandoned in 1989 after both parties looked more closely at the economics and regulatory hurdles facing such a deal.

Cap Gemini's track record is equally impressive. It is now Europe's largest services house with 50 per cent of sales coming from systems integration and software development. Like Ernst & Young, it went through a radical restructuring as Cap Gemini Sogeti and lost the original Sogeti tag.

The organisation has grown by a combination of organic growth and numerous acquisitions, not least the UK's Hoskyns Group in 1990.

Cap Gemini was one of the first services houses to see the true potential of Year 2000 work, and recent years have seen it acquire AT&T's finance and commerce business in the UK and the Beechwood Telecommications in the US. Unqualified success in America has eluded Cap Gemini to date, despite a number of acquisitions, but a merger with the likes of Ernst & Young may be the long-awaited springboard.

Previous rumours published in the national press suggested the E&Y mangament consultancy unit could be worth in the region of £3 billion.

As of mid afternoon GMT CAP Gemini shares had risen around 11 per cent on The Bourse to 202 euros.