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KPMG Enters Public Market Amidst Warnings

KPMG Consulting Inc., which has recently begun co-investing in VC deals, is expected to go public this week, with a massive deal of 367 million shares totaling $2.56 billion.

Even though other consulting firms in the dotcom-dependent market are suffering from abysmal share values, analysts say that KPMG is a high-quality company with a healthy infrastructure that should help it succeed on the public market, especially in the long term.

“Many of the companies in the [e-services] group are not going to recover because they don’t have the infrastructure to compete effectively,” said Randy Mehl, senior vice president with Robert W. Baird & Co., a research firm in Milwaukee. But he added, “I think that long-term demand is going to be good. KPMG, with its brand and infrastructure, should do well in this demand environment.”

Based in McLean, Va., KPMG has more than 7,000 consultants. The firm assists clients in defining and implementing their e-business strategies, by transforming their companies into Internet-enabled businesses.

Share values of similar firms range from unimpressive to devastated.

AnswerThink Consulting Group, a provider of consulting and information technology services to Fortune 1000 companies, has maintained its value since pricing at $13 on May 28, 1998, closing Oct. 12 at $13. Proxicom Inc., a provider of Internet solutions to Global 1000 companies, priced at $13 on April 19, 1999, and by closing on Oct. 12 had declined to $10.63. Scient Corp., a provider of eBusiness services, priced at $20 on May 13, 1999, and closed Oct. 12, 2000 at a depleted $12.25. Viant Corp., a provider of Internet professional services, priced June 17, 1999 at $16 and by Oct. 12, 2000 had plummeted to $5.50.

Many of these companies with declining values depend on dotcoms, which have suffered greatly since the post-holiday tech wreck. “The firms that struggled in the public market have been very focused on e-business,” said Brian Maimone, an analyst with ING Barings in New York. “They were having a significant portion of their customer base as dotcom customers. The dotcom meltdown really caused a significant change for these firms, which were building the storefronts for these vendors.”

Miamone added that Internet-based businesses that took an “unrealistic” view of the frenzied e-commerce market were blindsided by the severity of the decline in demand.

“They were essentially living in this fantasy world, in some cases not thinking about a market that would be maturing,” said Maimone, referring to the shifting interests and changing requirements of the Internet market.

Maimone and Mehl both pointed to the larger companies with the more developed infrastructures, like KPMG, as being the likely survivors of the dotcom decline. “Companies that are large and can serve companies on a multinational basis are going to be doing better than smaller firms,” said Maimone, adding that KPMG has “more diversified, global capabilities” than some of its competitors.

Despite the weak share values, not all analysts believe that the consulting firms are waning.

“Demand for technology consulting services remains very robust,” said Greg Gore, an analyst with W.R. Hambrecht & Co. in San Francisco. He also noted that Answerthink is experiencing healthy growth despite what its current share value may suggest.

Indeed, according to the company’s Web site, Answerthink’s net revenue for the first six months of 2000 increased to $158 million, up 31% from the $120.4 million reported in the first six months of 1999.

The industry may hold potential for growth, but the weak share values are still bound to scare off some investors.

“This is a difficult time to go public as a technology consulting company,” Mehl said.