Arbitrator Splits Andersen Firms

A French arbitrator has split up Arthur Andersen and Andersen Consulting, the dueling children of parent company Andersen Worldwide.

Under the arbitrator’s decision, Arthur Andersen can claim approximately $1 billion (US$) of Andersen Consulting’s money that has been held in escrow since the case entered arbitration in December 1997. However, Andersen Consulting has dodged a more expensive bullet: Under the ruling, Andersen Consulting does not have to pay Arthur Andersen the $14.5 billion that Arthur Andersen was claiming under the companies’ contract.

“This is a total win for Andersen Consulting,” said Joe Forehand, global managing partner and CEO of Andersen Consulting. “We won. It’s over. We have defeated Arthur Andersen’s preposterous claim that we owe them $14.5 billion. We owe them nothing beyond our contractual transfer payments, which end today.”

Arbitrator Dr. Guillermo Gamba of the International Arbitration Court issued his 129-page ruling last month, but it was first announced Monday by the Chicago-based firms. The ruling was also effective Monday.

E-Commerce Operators

Andersen Consulting has moved headfirst into e-commerce in the past year. For example, the company is involved in a joint venture with Sun Microsystems to set up a business-to-business (B2B) marketplace. The online venture is aimed at cutting purchasing costs on items such as office supplies, computer equipment and airline tickets.

In March 2000, Andersen Consulting and Microsoft Corp. announced an estimated $1 billion (US$) joint venture to provide midsize to large-scale customers with e-commerce applications built on the Microsoft enterprise platform and Windows 2000 operating system. Andersen Consulting is also developing an e-commerce portal for the State of North Carolina.

Both Andersen Consulting and Arthur Andersen have launched initiatives within the past few months to fund Internet startups.

New Name for Andersen Consulting

The decision, which cannot be appealed, requires Andersen Consulting to give up the Andersen name as of December 31, 2000 and to relinquish any technology jointly held by the two firms. However, under the ruling, Arthur Andersen cannot claim any technology developed by Andersen Consulting.

Even though the consulting firm will not be called Andersen Consulting any longer starting next year, Forehand expects it to be “business as usual” for the company’s e-commerce and other clients.

Forehand said, “Now it is time to move on independently, continuing to focus on our clients, our people and our ambitious reinvention agenda.”

Blood Feud

The bitter feud between the Andersen firms goes back nearly a decade. In 1989, as part of a restructuring, Andersen Consulting and Arthur Andersen were split into two stand-alone business units that were supposed to cooperate. Under the agreement, Arthur Andersen was to continue as a tax and audit accounting firm, while Andersen Consulting would provide management and technology consulting.

Andersen Worldwide was supposed to coordinate the efforts of the two units to make sure they continued to operate “cooperatively and compatibly.”

In December 1997, Andersen Consulting requested arbitration claiming that the agreement between the firms has been “seriously breached” by Arthur Andersen’s expansion into business consulting areas such as technology integration, strategic business planning and business transformation.

Money for Nothing

Andersen Consulting was also concerned about the annual payments that it was required to make to Arthur Andersen — payments the consulting firm said went “to finance the continued expansion of Arthur Andersen’s consulting business in competition with Andersen Consulting.”

Under the terms of the agreement, Andersen Consulting transferred up to 15 percent of its annual income to Arthur Andersen.

The terms of the agreement also required for Andersen Consulting to make a termination payment to Arthur Andersen of $14.5 billion if the consulting firm ever chose to break away from Andersen Worldwide.

However, the arbitrator ruled that Andersen Worldwide and Arthur Andersen were not entitled to this termination payment because Andersen Worldwide “breached its material obligations” under the companies’ agreements by failing to coordinate the practices of Andersen Consulting and Arthur Andersen.