Expanded US financial regulation to benefit consultants

July 29, 2009

By Sweta Singh
NEW YORK, July 29 (Reuters) – Expanded regulation of the U.S. financial sector could prove a bonanza in 2010 for Navigant Consulting Inc and other firms that help companies handle investigations.
Navigant and rivals Huron Consulting Group Inc, FTI Consulting Inc and CRA International Inc provide experts, including lawyers, to help companies deal with regulatory probes.
“A shared view among many investors is that changing regulatory landscape and the building amount of litigation should be increasing the amount of work for consulting companies,” said Timothy McHugh of William Blair & Co.

The Obama administration’s proposed budget for fiscal 2010 would boost the U.S. Securities and Exchange Commission’s budget by nearly 7 percent, giving it more funds to investigate companies.

The SEC is also expected to tighten oversight of corporate governance, mutual funds and scrutiny of investment advisers.

“The language coming out of the Obama administration is one of greater regulation,” analyst Sean Jackson of Avondale Partners said.

That could mean a big 2010 for consulting companies with heavy reliance on litigation practices and forensic work.

“We could have stuff come in back of 2009 but I think most investors are still looking more like 2010 — when you really start to see the benefits come in,” analyst Kevane Wong of JMP Securities said.

Navigant, which is currently working with British bank Northern Rock on dealing with the legal aftermath of its takeover by the British government, gets about 50 percent of its total revenue from handling government probes. It also helps clients manage legal disputes with other companies.

While the potential boom in government regulatory work signals a bright medium-term outlook for the consulting firms, it is disappointing to some who had hoped to see a boomlet of such business as soon as this year.

Shares of Navigant have fallen about 24 percent this year as a hoped for pick-up in business failed to materialize.

“Many investors are awaiting concrete signs of improvement,” McHugh said.

Late last year, analysts forecast a spike in earnings for consulting firms as a proliferation of lawsuits and

regulatory work stemming from the credit crisis was expected to increase demand for advisory businesses.

The exception has been FTI Consulting, which represented creditors in Lehman Brothers Holding Inc’s bankruptcy and gets a large part of its revenue from financial restructuring. It has seen its stock gain about 22 percent since January.

But with higher demand for their services starting next year, analysts estimate the other consulting companies are almost certain to see better earnings in 2010.

“There even could be an acceleration on the earnings front because a lot of these companies have gone through a significant round of cost cutting and are running much leaner now,” analyst Jackson of Avondale Partners said. (Editing by Steve Orlofsky)

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