March 27, 2002

Andersen CEO Berardino Resigns Amid Partners' Mounting Pressure

Joseph F. Berardino, the embattled chief executive officer of Arthur Andersen LLP, announced his resignation, even as the accounting firm pushed forward with talks to sell its nonaudit businesses in the U.S. for more than $1 billion, according to people familiar with the talks.

Mr. Berardino, Andersen's CEO for only 15 months, has come under increasing pressure from partners at Andersen to step down as the firm has become mired in mounting legal and financial problems stemming from its auditing work for collapsed Enron Corp.

Mr. Berardino announced his resignation on national television. Speaking on CNN, he said that Andersen had "been trying to make a negative into a positive," adding that "people just don't seem to be listening."

A sale of the firm's U.S nonaudit business -- including its tax-advice, human-resources and consulting businesses -- would continue what has become a piecemeal and somewhat disorganized dismantling of Andersen in recent weeks.

Since the firm was indicted on criminal charges of obstruction of justice for destroying Enron-related audit documents, many corporate audit clients have abandoned Andersen, and a number of Andersen's overseas affiliates have said they will leave Andersen and join other Big Five accounting firms. Andersen has pleaded not guilty to the charges.

People familiar with the talks say Andersen is holding discussions with several firms -- including Deloitte & Touche Tohmatsu and KPMG -- to sell U.S. operations that weren't connected to the Enron scandal. While the talks are at an early stage, Andersen has told potential buyers that it would like to announce at least one of the deals within the next week.

The negotiations are at a sensitive stage and may not result in a deal, especially given Andersen's prior failures to sell any of its businesses, according to people familiar with the talks. Potential acquirers of the assets will have to weigh the advantages of pursuing a deal now, or waiting to see if the same assets become available more cheaply in the event of a complete collapse of Andersen.

"Things are very fluid right now," said one person close to the talks. "We don't have a handle on what the terms of a deal would look like."

Earlier discussions to sell everything but the U.S. audit business to Deloitte & Touche were broken off because of Andersen's potential legal liabilities.

Estimates of how much Andersen's U.S. nonaudit businesses would fetch in a sale vary widely, with some investment bankers saying that it could total as little as $1 billion, and others saying it could be as much as $5 billion, depending on how the deals are structured. Andersen doesn't break down financial results for its U.S. businesses, but its total North American revenue was $4.49 billion last year; world-wide revenue, including auditing and all other services, totaled $9.34 billion.

It's unclear how much, if any, of the cash from any sale would be available to the various parties suing Andersen in connection with its Enron auditing work. Whatever the amount that may eventually be available from any sale of businesses, combined with other Andersen assets, it is likely to be dwarfed by the tens of billions of dollars lost by Enron's shareholders, creditors and employees who owned stock in their retirement savings plans.

Andersen's human-resources business, which focuses on executive recruiting and outplacement, is the most valuable of the three business units and could by itself sell for as much as $1 billion, according to people close to the talks. While Deloitte and KPMG are both interested in the business, people familiar with the talks say other consulting firms -- including technology and management consultants -- also have expressed interest.

The tax business could also fetch as much as $1 billion, according to people close to the talks. Deloitte and KPMG are holding discussions for the businesses, but people close to the talks say a deal may also be structured as a no-cash transfer, where tax partners agree to move to another firm for a nominal premium. Andersen's consulting business could also be sold as a no-cash transaction, in which partners switch over in exchange for noncash considerations.

The value of Andersen's assets -- a number that could change substantially as a result of the defection of foreign offices and the potential sales of U.S. units -- is of crucial importance to Enron shareholders and employees who have sued Andersen, and to creditors who have indicated they are likely to do so. The suits allege that Andersen conducted a flawed audit that made Enron's financial condition look better than it really was.

As of Aug. 31, 2001, before it was swept into the Enron scandal, Andersen Worldwide had available cash of more than $800 million, according to someone familiar with the firm's finances at the time. At the time of the indictment, the firm still had more than $500 million of cash available, according to another person familiar with the matter.

Andersen's early efforts to strike a quick universal settlement of Enron-related claims foundered when plaintiffs' lawyers rejected an Andersen offer to settle with all parties for $750 million, which Andersen claimed was all it could afford. That offer included $250 million from insurance coverage, and $500 million from future revenue. The rapid erosion of Andersen's core auditing business, coupled with the loss of foreign offices, has already diminished the money available from future revenue.

It is possible that the continuing breakup of Andersen could add to the firm's coffers. Under their agreements with Andersen Worldwide, most of the firm's foreign operations are obligated to pay Andersen 1-1/2 times the previous year's revenue to withdraw from the partnership, people familiar with the agreements say. Andersen has said it will try to collect that money, though others say it could be difficult if the departing partners resist making the payments because of the deterioration of the firm.

Any proceeds from the sale of U.S. operations would also go into the pool of capital available to the firm. But if those sales are accomplished through a Chapter 11 bankruptcy filing, as has been discussed, any legal claims against the firm would have to be administered through the bankruptcy court, where claimants would have to line up with other creditors of the firm.

"It would probably be bad news for claimants, because in Chapter 11, negligence and malpractice claims against Andersen would come out of the woodwork, and would likely take years to administer," according to one bankruptcy-law expert involved in the matter.

The talks about U.S. asset sales come as a significant crack emerged in Andersen's plan to sell its overseas operations to KPMG International. The law practice of Andersen's Spanish partnership said it had voted to leave the firm, while talks with KPMG about Andersen's operations in Germany, Japan and Australia are "coming apart," according to a person familiar with the negotiations. The Australian talks have foundered over a legal dispute, while in Japan and Germany negotiators are battling over financial terms.

Andersen's Spanish partnership is the crown jewel of the firm's European operations, doing audits and consulting for nearly every major Spanish company, so its breakup would cut the value of any deal for Andersen's international partnerships.

In Europe, it's common for accounting firms also to have law practices, though that is not allowed in the U.S. Andersen's Spanish law practice, known as Garrigues & Andersen, is the country's largest law firm, and a firm spokesman said no decision had been made about the firm's new name or its future partners.

Andersen's auditing and consulting operations in Spain are still talking to KPMG about a possible deal, the firm said, as are Andersen's other overseas operations in Europe and Asia. But the Spanish lawyers aren't the only ones going off on their own. Andersen's Hong Kong, China, New Zealand and Russia affiliates signed on with rival firms last week. Andersen and KPMG have both said they still believe a deal can work.

Andersen's clients also continued to leave the firm. Tuesday, Idexx Laboratories Inc., a Westbrook, Maine, biotech concern; MDU Resources, a Bismarck, N.D., energy-services company; World Fuel Services Corp.; and Centex Construction Products Inc. all fired Andersen.

Write to Robert Frank at robert.frank@wsj.com² and Mitchell Pacelle at mitchell.pacelle@wsj.com³

Updated March 27, 2002 11:19 a.m. EDT