Who’s Nixing Andersen Now?

Sara Lee, Abbott Labs also throw over AA. Plus: SEC to issue guidance to remaining Andersen clients, lawmakers mull new 401(k) rules, and here come the carve-outs.


Another week, another dose of bad news for Arthur Andersen.

One day after the Justice Department indicted Andersen for shredding sensitive Enron-related documents, the U.S. government told the auditor—as well as Enron Corp.—that it will no longer award new contracts to either company.

The General Services Administration said Enron was suspended from new government business for one year while Andersen was suspended for the duration of the indictment. “Under law and regulation, the government may award contracts only to responsible contractors,” said the agency in a statement.

The suspension includes Enron units; several former Enron executives, including former CFO Andrew Fastow, former chairman Kenneth Lay, and former president Jeffrey Skilling; and David Duncan, a former Andersen partner.

Meanwhile, the number of major companies that have dropped Andersen as auditor now stands at 46. according to published reports. The latest droppers: healh care products specialist Wyeth, food company Sara Lee Corp., biotech firm Abbott Laboratories, and Brunswick Corp., maker of pleasure boats and engines.

The Wyeth defection must be particularly painful for Andersen management. The company, formerly known as American Home Products, has used Andersen as its independent auditor for 33 years. Wyeth management selected PricewaterhouseCoopers to succeed AA as the company’s auditor for 2002. PwC, the largest professional services firm in the U.S., has picked up several notable accounts from Andersen of late, including the firm’s largest publicly traded client, Merck.

In a related story: the SEC reportedly plans to issue a 70-page packet that will offer detailed guidance for Andersen’s remaining 2250 or so publicly traded clients, including what to do if the firm goes out of business.

(To see which accounting firms will gain from Andersen’s decline, read “Who Goes Up If Andersen Goes Down?”)

House Committee Seeks New Pension Rules

If lawmakers get their way, employees will be able to dump their company’s stock much sooner than current rules permit.

The House Ways and Means Committee approved a measure that would cut the amount of time employees can be required to hold on to matching stock contributions from their companies. The legislation is similar to a plan offered by President Bush.

According to the proposal, employees would be allowed to sell matching 401(k) stock contributions from their employer after three years. For other types of company plans, such as Employee Stock Ownership Plans (ESOPs), participants would be permitted to unload nonelective contributions of employer stock after five years.

Currently, employers can require employees to hold on to the matching contributions for a specified period of time. Often, that period is a minimum number of years at the company or a milestone birthday.

Such requirements came under fire after Enron employees saw large portions of their pension accounts shrivel to nearly zero after the energy company filed for bankruptcy.

Under the House bill, companies must give employees at least a 30-day advance notice whenever there is a significant period that employees can’t access their accounts, such as when the employer is changing retirement-plan administrators. This was also a major issue for Enron plan participants.

The bill also requires companies to explain to employees on a quarterly basis generally accepted investment principles, such as the importance of constructing a diversified portfolio.

What’s more, corporations face possible excise taxes if they don’t meet the investment and blackout period notification requirements. Also under the bill, employees can pay for retirement advice from a professional on a pretax basis.

Other Accounting News

Management at Boeing Capital said it may have to add $1.2 billion of assets and liabilities to its balance sheet because of possible new accounting rules regarding off-balance-sheet transactions.

In an SEC filing, Boeing Co.’s aircraft financing division said it has used special-purpose entities—those off-the-books partnerships that got Enron into trouble—in certain aircraft financing transactions.

The Financial Accounting Standards Board is mulling rule changes that would affect how companies account for special-purpose entities.

Meanwhile, Sears, Roebuck and Co. said it expects to take a $208 million, noncash charge in the first quarter in connection with FASB’s new merger accounting rules. The write-off stems from past acquisitions of National Tire & Battery and Orchard Supply Hardware stores. (For more on FASB’s new merger accounting rules, see “The Goodwill Games.”)

Big Week for Mega-IPOs

A couple of large companies are expected to complete their initial public offerings this week.

Travelers Property Casualty Corp., the Citigroup insurance unit, plans to sell 210 million shares for $16 to $19 a share. That would enable the insurance company to rake in nearly $4 billion. Travelers management also plans to raise $850 million of convertible debt.

Alcon Inc., the eye care business of Swiss food giant Nestle SA, expects to raise as much as $2.4 billion when it sells 69.8 million shares at $31 to $35 apiece.

Both IPOs are carve-outs (partial offerings of a company unit via an IPO). In 2001, U.S.-registered carve-outs accounted for 50 percent of U.S.-registered IPO dollar volume, according to Reuters, citing John Brand, an IPO analyst with Dealogic.

This year, carve-outs have only accounted for 20 percent of the value of IPOs. But this figure would swell to about 71 percent after Travelers and Alcon come to market.

This is Travelers second time around as a public company. As you recall, Citigroup bought its outstanding shares several years ago. Some of the proceeds of the offering will go to pay back money owed to the parent company.

Meanwhile, management at General Electric Co. said it may split off Employers Reinsurance Corp., its volatile property-and-casualty insurance business, according to published reports. The carve-out could involve an IPO of 20 percent of the unit, which would value the insurance operations at $8 billion to $10 billion, according to one report.

High Interest in High Interest

U.S. junk bond mutual funds sucked in $1.23 billion of new cash in the week ended Wednesday, the most since May 1997 and the second-largest weekly inflow ever, according to AMG Data Services.

Junk funds have pulled in $2.33 billion during the past two weeks, accounting for more than 3.4 percent of all junk bond fund assets tracked by AMG.

The average junk bond currently yields 12 percent; that’s 700 basis points more than similarly yielding U.S. Treasuries, according to Merrill Lynch. This spread is down from 7.29 percentage points a week ago, and 7.92 at the end of February.

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