Cisco to invest £640 million in KPMG

Cisco Systems plans to invest more than £640 ($1 billion) in KPMG, a move that would give KPMG a capital infusion to expand its Internet services business and provide Cisco with a small army of e-business integrators.

If the investment goes through, KPMG will hire or train 4,000 Internet integrators over the next 18 months. Those integrators will provide services to customers brought in by Cisco's direct sales force. In addition, KPMG will build six "Internet innovation centres" and support Cisco's existing customers as well as new customers. KPMG plans to incorporate its Internet consulting practice as KPMG Consulting, with Cisco represented on the new entity's board of directors. The companies have signed a letter of intent to do the deal, which is expected to close next month subject to government approval.

With the deal, KPMG would become, in effect, Cisco's "dedicated SI team," according to a Cisco spokesman. The spokesman added, however, that the arrangement is not exclusive from Cisco's perspective. "Cisco will continue its relationships with all its integrators," he said. He said Cisco needed to cultivate closer ties with certain consulting firms to meet customer demand for services.

The pending Cisco investment points up a long-time problem for accounting/consulting firms: how to raise capital within a partnership structure. Part of the problem is the auditor independence issue, which makes outside investments somewhat dicey. For example, conflict of interest issues would arise if an accounting/consulting firm received a cash infusion from an audit customer or an affiliate of an audit customer. The auditor independence requirements are stated in US federal securities laws.

In a January letter to KPMG, the Security and Exchange Commission stated "ownership by an audit client, or by an affiliate of a client... of an equity interest in KPMG or its affiliates is inconsistent with the language of purpose of these [federal securities] provisions". But a spokesman for KPMG said that the company has no "independence concerns" regarding the Cisco investment. Cisco's auditor is PricewaterhouseCoopers.

The spokesman said KPMG plans to sell a portion of the KPMG Consulting unit to the public. That move, however, will be on hold until the Independence Standards Board sets rules under which accounting/consulting companies may conduct initial public offerings for their consulting units. The KPMG spokesman said that rule making is due in spring 2000.