This week was fabulous for two reasons - one that we spoke about an acquisition in the banking space (probably the most confusing and most interesting for it offers varied dimensions with respect to regulations, market share, etc) and another we got to understand how AT Kearney steered through the Mid 90s and then through all of the 21st century till 2011. Let me start with a brief on AT Kearney and will discuss about the Nova Scotia acquisition in my next post.
For all of those who did not know, AT Kearney was acquired by GM's outsourcing arm EDS in 1996 (at least I did not know this). EDS (Electronic Data Systems) was a company setup by GM (General Motors) as an IT outsourcing arm. It was when GM realized that it's core business is in making and selling cars, that it spun off Hughes and EDS in 1996. In later half of 1995, that was when EDS aspired to become a consulting and outsourcing company (Aka Accenture in today's world) and so it started on a shopping spree and acquired 39 small consulting firms. Finally it reached to partners of AT Kearney and offered $300 million in cash and $300 million in EDS shares to buy the consulting firm in December 1995. In addition, AT Kearney was promised complete autonomy and also a task to integrate and manage the 39 consulting firms that EDS acquired. As a result, AT Kearney became double its size after integrating the consulting firms within itself. Between 1996 and 1998, after EDS was spun off, the share price of EDS rose from $42.06 to $78. This made the AT Kearney partners even more happy as they were holding shares of EDS. It was those very happy times when the EDS and AT Kearney combination struck a $5.3 billion deal with Rolls Royce in order to make it the number one in the Aero Engine space (pushing GE to number two). However a series of mismanagement and the dot com bubble sank the EDS share price to $8. This made the partners really worried as they were dreaming of a healthy and wealthy retirement. The decline forced the then CEO out and the company got in a new CEO. The CEO had different plans - he was amused by the fact that the AT Kearney folks were getting special treatment (as usual as a consulting firm) and the consulting firm had different management structures (independent CEO and senior leadership) and policies. Much to his amusement, the new CEO decided to bring commonality across the organization (EDS + AT Kearney). As usual, this evoked the partners of AT Kearney and they started to revolt and as a result approached the CEO seeking a buyout option and the proposal was rejected by the CEO. Given with a task of getting the company back to glory, the new CEO was on a road show promising sun and moon. This got the share price back to $42.06 and the CEO sold all his shares at that healthy price. EDS board got to understand this and they fired the CEO. In addition, the CEO was trialed for insider trading. This news sank the share prices to historical low. Finally EDS got a sensible guy, a partner in McKinsey. He understood the operations of a consulting firm and felt that it had to stay autonomous. Realizing this, the partners in AT Kearney approached the new CEO (the McKinsey guy) for a buy out. The CEO and the board of EDS was fine with this. Immediately, the partners put together a buy out package and asked the CEO of the consulting firm (very unusual to have a CEO in a consulting firm however it had one) to reach out to EDS board to present the case. The then CEO of the consulting firm traveled all the way to Texas to present the case. While on the journey to EDS headquarters, he felt he might be crowned as a hero if he were to buy back the consulting firm cheap and as a result cut the offer price by 40%. After his presentation, the CEO of EDS just threw him out of HQ for faulty valuation of the consulting firm (Mind you the new CEO of EDS was from McKinsey) and AT Kearney was put on auction (it is a process where the target firm is put on sale by the parent company). Monitor approached EDS to buy AT Kearney but offered such a low price that it forced the CEO of EDS to give AT Kearney one final chance to put together a business case for MBO. Four senior partners of AT Kearney got together in preparing the business case (just over a weekend). It was one of those innovative packages that involved - Equity, Debt, and PIK (Payment in Kind). AT Kearney was supported by Morgan Stanley and EDS was supported by Goldman Sachs. Since it was a high profile and tense buyout, both parties intended to have investment bankers on their side. Despite push from Morgan Stanley to price up the deal, as their fee is tied to the acquisition value (very strange how these IB firms work - their job is to get you the lowest price in case of a MBO where in they were trying to push the price up), AT Kearney put together a package for $200 million that involved $40 million in equity, $100 million in Debt, and $60 million in PIK (Payment in Kind - this means that the consulting firm is available to offer services at free of cost to EDS for a certain period). The buyout package was accepted by EDS board as the CEO and board expressed their appreciation for PIK. This way AT Kearney became an independent consulting firm again. The partners were able to pay back the debt within 6 months and Morgan Stanley walked away with $7 million in fees. Today the total revenues of AT Kearney is little less than a billion dollars (I guess about $850 million).
This is a story told by my professor who was a witness through the entire process and was one of the four partners who finally bailed out AT Kearney from EDS. Today the consulting firm is at the bottom of the "Industry smile curve" (a tool that graphs firms based on market share and profit margins - this tool is very helpful to understand who will be the next target and how the industry is likely to consolidate) and could be a target again for M&A. The leading players in the consulting industry today - PWC, Deloitte, E&Y, and McKinsey have revenues more than $5 billion (Deloitte is the market leader with $18 billion, followed by PWC with about $13 billion, E&Y with about $11 billion, and McKinsey with about $6 billion). Already we have seen Monitor acquired by Deloitte and as we would experience more consolidation in this industry, the probable targets could be AT Kearney, Booz, and Bain.
My professor has now left AT Kearney (a year ago after serving the firm for 26 years) and is a senior partner with E&Y in their transaction advisory.
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