Going Concern March Madness: The Coolest Accounting Firm – Round 2

LECG Corporation, a global professional services company that specializes in “global litigation; economics; consulting and business advisory; and governance, assurance, and tax expert services” is spinning off five practice groups to help pay off $27.8 million on a credit facility. Two of the expert groups are going to FTI Consulting, Grant Thornton is picking up two groups and also a third that is being split with WeiserMazars. News of this fire sale has given LECG’s stock price a serious case of the Mondays (bolding is ours).

The tenth amendment to the credit agreement is expected to tion several practice groups to other firms and determines the process for similar transactions in the immediate future. The tenth amendment also will limit how LECG may use its cash until it repays its lenders. The facility matures on March 31, 2011 and approximately $27.8 million is outstanding. Absent sufficient proceeds from the transition of practice groups, the company will not have adequate cash resources to repay amounts outstanding under the facility.

The transaction with FTI Consulting, Inc. involves the transition to that firm of LECG’s International Arbitration and Aviation Competition practices and is expected to be effective today, subject to satisfaction of closing conditions, including the consent of its lenders to the release of liens on certain assets to be transferred. Terms were not disclosed.

The company also signed a letter of intent with Grant Thornton LLP to transition the company’s tax and business consulting groups. Simultaneously, the partners of LECG Partners, LLP, which provide attest services under an alternative practice structure, will continue to provide their professional services with either Grant Thornton LLP or WeiserMazars LLP.

The announced transitions will involve approximately 350 employees in Atlanta, Albany, Cambridge, Chicago, Devon, Harrisburg, Houston, New York, Schaumburg and Washington, DC.

Doug Phillips, Managing Partner of WeiserMazars told GC that the firm is “working to close the agreement” and that it is expected to finalized this afternoon or tomorrow morning. WeiserMazars will assume five partners and 40 professionals and they will be based in their Horsham, Pennsylvania office. Messages left with Grant Thornton, FTI Consulting and LECG were not immediately returned.

These spin-offs are occurring less than a year after LECG merged with Smart Business Advisory & Consulting, however a quick glance at their last three income statements shows drastically dropping revenues from $370.43 million in 2007 to $335.68 mil in 2008 and $263.20 mil for 2009. Cash flow from operations was also trending negatively for the last three years and the company’s equity is dwindling. By the count in the LECG/Smart press release, the company will have around 300 employees remaining after the transitioning of these practices groups is finalized. Not too good, man.

Despite all this, Deloitte’s most recent audit opinion was a clean one with no indication that the company was having problems. This fire sale of revenue-producing assets tells a very different story and we can’t say that we’d blame anyone that was thinking about rushing for the exits. If you’re in the know, email us and we’ll update you as we learn more.

UPDATE:
After poking around a little bit, we have a bit more to share (although more questions seem to persist). A source familiar with the consulting industry informed us that FTI Consulting was very interested in LECG’s European locations however, there’s nothing in the press release that indicates that this was part of the deal, despite the fact, our source said, that Paris is major hub for international arbitrage. Our source speculated that LECG would liquidate in the next 60-90 days which confirmed the thoughts shared with us by a source close to LECG.

One other interesting item of note – Grant Thornton continues its expansion, with the pickup of these tax, advisory and attest groups. It’s not entirely clear what areas in advisory GT picked up here but we’re definitely seeing Stephen Chipman’s dreams of my dynamism (yes, it’s a word) in action.

UPDATE 2:
Joseph DiStefano writes over at PhillyDeals that the deal would “[leave] about 1,000 with LECG in its remaining units.” Our previous number was based on the 650 cited in the March 2010 press release which appears to not have included the number of Smart employees that were added to the headcount.

DiStefano also published portions of a letter that LECG Managing Director John B. Stine II sent to clients:

“I am very excited to report that our tax, compensation & benefits, consulting and certain components of the audit practice of LECG (formerly SMART Business Advisory and Consulting) have joined Grant Thornton in its offices in Philadelphia, New York, Chicago, Atlanta, Portland, and London.

“Grant Thornton, the sixth largest firm globally, proved to be the best choice among the 11 accounting firms and 6 consulting firms that pursued our team.

“In only 10 days, Grant Thornton went from an initial one-on-one meeting to Board approval and sign-off of a deal that brings over 300 professionals to the firm…

So based on that it sounds like there were a bunch of firms in the mix and Stine gave clients the reasons behind going with GT: “Grant Thornton was the only firm with a similar roster of clients […] in contrast to the numerous local firms that showed enormous interest in doing transactions that cut out geographies or service lines.”