EY’s Shelved Breakup Proves That Even Halted Splits Are Costly

Ernst & Young’s planned spinoff of its consulting business and much of its tax practice may have fizzled, but it still left a long trail of bills to pay.

The firm through an entity called EYGS LLP set up a $700 million credit line to fund efforts to split up its global business and also increased the size of a second credit facility to $450 million, financial statements filed with the UK government show.

Complex, global carve outs typically require teams of lawyers, consultants and marketing pros to legally separate the businesses and to prepare the new company to operate independently. Those costs can mount quickly, even for deals that never cross the finish line.

“These are just labor intensive processes that need to be done to really make sure you’re doing a very successful divestiture,” said Shane Goodwin, finance professor and associate dean at Southern Methodist University. The ultimate cost is “relative to what one believes the value they’re going to be getting from spinning off this division.”

Top EY leaders had argued that the firm’s consulting business and its audit practice would be stronger and more valuable apart than together. As a standalone company, the consulting arm would have an easier time recruiting technologists and engineers and the audit practice largely would be freed from conflict of interest risks, firm leaders maintained.

The $49 billion global firm shelved its breakup plans last spring amid disagreements over compensation and how to divvy up the firm’s tax practice.

Beyond the initial cash outlay, firm leaders also spent political capital trying to convince partners that dividing the global professional services firm in two was the best thing for EY.

In the aftermath of the canceled plan, its largest affiliates in the US and UK have cut jobs and spending. The US firm also overhauled its governance giving rank and file partners more control over the direction of the firm.

EY has previously used its lines of credit to invest in technology or to grow its business. The firm called the financing “modest.”

“As already communicated to our partners, the costs incurred during Project Everest will be almost entirely paid down by July 1, 2024. There is no change to this position,” the firm said in a statement.

Costs Behind a Deal That Wasn’t

It’s common for companies to take on financing to cover up-front costs. Separating IT systems, hiring outside valuation experts, plus accounting and tax work all add to the expenses companies face when they look to spin off one or more divisions.

EY staff likely tackled some of the legwork needed to disentangle major portions of the firm’s business, possibly saving EY money by not having to hire outside help, said Lisa Snow, founder and CEO of Snowbridge Global Advisory LLC.

But the firm would still have to pay its staff who otherwise could have brought in revenue working for an external client.

“They have the bandwidth and the talent and the people available to perform more of the work on behalf of the divestiture than a corporation would,” Snow said.

Costs for EY’s halted plan would have been even steeper, reflecting items like banking and financing fees, had the transaction moved ahead.

“The path to a successful transaction is littered with challenges, and deals can and do fall apart,” Jim Osman, founder and chief executive of the spinoff research firm The Edge Group LLC, said in an email. “The complexity and scale of the endeavor means that many factors need to align for a spinoff to proceed.”

It’s not uncommon for preparation costs of a spinoff of this scope to total as much as 3% of the combined business’ revenues, Osman said.

In comparison, EY’s $700 million lending facility represents just 1.4% of its 2023 global revenues.

Still the pair of credit lines warranted a note in EY’s own going concern assessment—the firm argued that the combined financing demonstrates that the firm has ample access to capital, according to its 2023 financial statement.

“During the year, the group’s liquidity needs changed due to its expenditure on the provision of services in respect of a strategic network review,” the firm said in a later footnote explaining the use for the extra funding.