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Andersen seeks buyer, but any deal is a tough sell

Accounting firm Andersen, facing an exodus of prestigious clients and possible criminal charges for its role in the Enron scandal, is in talks to merge with rival Deloitte Touche Tohmatsu, sources familiar with the talks told Reuters Monday.

Andersen, which has been shaken to its core by investigations stretching from Wall Street to Washington, is a dicey merger partner because of its heavy legal baggage. That's why a deal could easily fall apart, or could take the form of a series of unit sales, the sources said.

"It's a great opportunity for Deloitte, but there are major pitfalls," said Robert Willens, an analyst with Lehman Brothers. "They've got to make sure they don't get tainted by Andersen's liability and they've got to make sure they don't overpay."

Any merger deal would have far-reaching consequences for the accounting profession, which would become further concentrated if Chicago-based Andersen combined with another firm. The current group of top firms, known as the Big Five, dominate the corporate auditing business and the remaining four would gain significant heft if Andersen collapses.

Structuring a deal to combine Andersen and New York-based Deloitte -- which together employ 180,000 people worldwide and booked nearly $22 billion in revenues last year -- is no small feat. Andersen's legal woes could derail any deal, and the accelerating pace of client defections represents a major obstacle.

"What are you buying here?" Willens said. "You are buying goodwill. What Andersen is selling, they don't really own, and that's the client relationship."

Andersen and Deloitte representatives declined to comment on the talks, which were first reported by the Wall Street Journal and New York Times. Both issued statements that didn't rule out any options and sources close to the talks told Reuters said negotiations were ongoing.

"Andersen and Deloitte are having ongoing discussions involving a merger or the sale of all or parts of Andersen," said one source. "It's very unclear as to how any agreement would be structured."

MERGER SCENARIOS

Andersen is shopping itself -- but it's a hard sell.

Mergers are always complicated, but bankers start looking for pain killers when the mix includes a few billion dollars worth of liability claims.

"The buyer really has two choices: Hold his nose and take the risk or do the purchase under the protection of the bankruptcy laws," said Jonathan Aberman, a partner at law firm Fenwick & West LLP in Washington.

One favorite structure involves setting up a subsidiary to house the assets that carry future liabilities. The scenario does carry the risk creditors go after the parent company.

"Whenever you do an acquisition like this, you want to cordon off the bad assets, even if you are taking them without liabilities," said Brian Hoffmann, a partner with Cadwalader, Wickersham & Taft.

Another popular strategy is to arrange a sale through a prepackaged bankruptcy plan, enabling the acquired company to leave certain liabilities behind. Bankrupt companies also can reorganise as new enterprises and establish a trust fund to handle all previous liabilities.

"The bankruptcy courts are very adept at giving clean title," said Douglas Baird, a law professor at the University of Chicago Law School.

DESPERATION

A Deloitte acquisition faces many hurdles, in particular how to deal with Andersen's myriad legal problems. Andersen faces Enron investor lawsuits and possible fraud or other criminal charges.

Andersen, which operates in 84 countries, signed off on bankrupt Enron Corp's books. The firm has admitted its Houston office shredded documents sought by investigators and now faces possible obstruction of justice charges.

Enron shareholders are suing Andersen, and the firm has reportedly offered $750 million to settle the disputes. Major plaintiff firms suing Enron and Andersen scoff at that number, and are demanding billions of dollars.

In the next few days, Andersen attorneys are expected to try to reach a settlement with the US Justice Department to avoid facing criminal charges for document shredding, The Wall Street Journal said Monday.

Andersen is fighting to stave off its own demise following Enron's bankruptcy on Decemebr 2, which marked the largest ever US bankruptcy filing.

Enron -- and Andersen's role as its auditor -- is now the subject of more than a dozen US congressional investigations as well as probes by the Securities and Exchange Commission and the Department of Justice.

The publicity surrounding Andersen's role in the Enron fiasco has prompted many top flight clients, such as Merck & Co and Delta Air Lines, to dump the firm as auditor.

The firm has lost 36 clients since the beginning of the year, or nearly half the total client losses among the Big Five in that time, according to Auditor Trak, a research unit of Strafford Publications. It has gained only two clients.

On Monday, transport giant FedEx Corp and regional bank Riggs National Corp joined a list of long-standing clients to ditch the accounting firm.

Andersen has fought hard to improve its image. In a headline-grabbing move early last month, Andersen brought in former US Federal Reserve Chairman Paul Volcker to head a special panel charged with recommending reforms at the firm.

Volcker on Monday hastily convened a press conference to outline new requirements applicable to Andersen, which center on a split between auditing and consulting work.

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