Business school instant case: EY’s failed break-up plan
Simply sign up to the Business education myFT Digest -- delivered directly to your inbox.
This is a teaching case for business schools drawing on topical issues and debates reported in the FT
Project Everest: the ascent begins
In late spring 2022, Carmine Di Sibio, EY’s global chair and chief executive, embarked on a bold plan to disrupt and reshape the large global accounting and consulting firm — and with it the auditing and consulting industries. Under “Project Everest”, the Big Four firm would be split into two entities: the traditional audit-focused network of partnerships and a newly formed publicly-held consulting corporation (NewCo).
EY’s third primary line of service, tax compliance and consulting, would be divided between the audit and consulting businesses. The EY brand name was to remain with the audit firm. Upon approval and implementation, partners remaining with the audit firm were in line to receive multimillion-dollar payouts while consultants moving to the new consulting firm were to receive equity in NewCo.
The mountain is high
Project Everest was a complex undertaking. The Big Four global firms are organised as networks of separately owned partnerships in individual countries. The break-up would require approval by partner vote in EY’s significant territories. Also, the auditing industry is highly regulated around the globe and Project Everest would require approval from several independent regulators.
The network’s 390,000 partners and employees had to be allocated among the new audit and consulting businesses. On top of it all, NewCo would require successful completion of an equity IPO and substantial bank borrowings to raise $30bn to cover pension liabilities and payments to partners on the audit side. NewCo’s business case was predicated on high future revenue growth rates for the consulting business.
The view of competitors
Although EY leaders believed that their vision from the mountain top was the clear future of the audit profession, their Big Four competitors announced that they had no plans to break up and would maintain their current integrated business models.
The mountain begins to shake
By late 2022, signs emerged that Project Everest might be in trouble. Objections were coming from retired partners. The audit partners were unsettled about the level of technical and expert resources that would remain with the audit firm post-split, and tax personnel were confused about where they would end up.
In addition, global economic conditions were changing. Significant lay-offs were being announced in accountancy and beyond, and interest rates were rising. Regulators’ views of the proposed split were still publicly not known.
The fast trip down the mountain
By early April 2023, EY had abandoned Project Everest, announcing that the US firm had decided not to approve and move forward with the break-up. Consulting partners chafing at independence rules were left unhappy, employees were uncertain about the future strategy and clients were left with many questions. Above all, the future of EY leadership globally and in the US was very much in doubt.
The impact of successful completion of Project Everest would have been a fundamental change in EY and perhaps the entire accounting profession. What were EY’s primary objectives with Project Everest? What problems was EY attempting to solve with the proposed strategy?
What internal and external obstacles did EY face in structuring and completing Project Everest?
Why didn’t the other Big Four firms (Deloitte, KPMG and PwC) endorse EY’s concept of splitting into separate audit and consulting practices?
Why was Project Everest not completed? Was it primarily due to one or more of the following factors: (a) A flawed strategy? If so, in what ways? (b) Poor execution of the plan to divide the firm into components? Which elements of the plan were poorly executed? (c) Market and/or financing conditions? Should these conditions have been better anticipated by EY’s leadership?
What do you believe will be the short- and long-term impacts on EY specifically and the audit profession generally because of the failure of Project Everest? Will EY try again? Are separate audit and consulting firms the destiny of the Big Four firms?
Read more about EY here.
Jeffrey Johanns is associate professor at the McCombs School of Business, University of Texas at Austin