Global services powerhouse would be created in $3.5 billion stock and cash deal; regulatory review likely, analyst says
Posted Jul 30, 2002
There will be no more jokes about "Monday," it appears. IBM announced today it will buy PricewaterhouseCoopers Consulting in a cash-heavy deal worth $3.5 billion.
Further details of the acquisition were played out at an after-market-close press conference, though rumors were swirling yesterday, according to AMR Research Senior Vice President Jim Shepherd. "We noticed that a lot of people at IBM Global Services had disappeared in the last few days. Now we suspect that they've been a little busy."
The deal is expected to bolster IBM's CRM consulting presence, which along with supply chain and ERP, have been underrepresented in Big Blue's product portfolio. "They bought a lot of practices that are right on the cusp of overlapping," says Christine Ferrusi Ross, a senior analyst at Forrester Research. "IBM has some custom infrastructure outsourcing while PwC has great packaged outsourcing around the likes of SAP." Ferrusi Ross sees the outsourcing movement spreading among competitors too, including KPMG and Accenture.
The deal calls for IBM to pay $2.7 billion in cash, $400 million in stock and the remainder in convertible notes. IBM's service business, which already employs 150,000, will take on another 30,000 with the acquisition. Though administrative redundancies will go, Shepherd doesn't see any other shrinkage in employee ranks. "Billable assets are billable assets," he says. PwC Consulting racked up an estimated $4.9 billion in revenues during FY2002, while IBM Global Services as a whole took in $35 billion in 2001.
"They didn't do this to buy revenue, they got a lot of skills from this deal," says Ferrusi Ross. "At the same time, they bought a company for less than their annual revenue. There's your ROI right there."
Though its the first big step taken by new IBM CEO Sam Palmisano, the acquisition is another milestone in the legacy of IBM chairman and former CEO Lou Gerstner, who transformed the mainframe giant into a professional services company. Though IBM became well established in management consulting, the company suffered from an image problem, says Shepherd, because Big 5 competitors characterized IBM as a systems integrator/technical services firm that wasn't suited to process reengineering and change management.
The deal puts an end to PwC Consulting's long delayed initial public offering and the company's controversial decision to change its name to "Monday." Though they'll be ordering business cards yet again, PwC consultants now have a sturdier brand to stand on. Forrester research conducted this year shows IBM is the most desirable name in consulting, mentioned three times as often as runner-up Accenture. Samuel DiPiazza, CEO of PwC said the transaction fulfills a commitment to fully separate PwC Consulting from PwC. "It will unleash the consulting unit from the regulatory restraints of our industry, and will allow the business to reach its full potential," he said.
In late 2000, Hewlett-Packard contemplated buying PwC's consulting business for a reported $17-18 billion, but backed out before the deal came to fruition. IBM's news today touched off speculation that HP or Sun Microsystems might be in the hunt for a similar acquisition, and that Deloitte Consulting might be the obvious target.
"The PwC HP wanted to buy was a lot more about strategy than today's PwC," says Ferrusi Ross. "If you look at KPMG and Accenture, they too are following the move to outsourcing."
The deal is is now the blockbuster of the year, easily quadrupling GE's earlier sale of its e-business unit, but still subject to regulatory approval and a blessing from local PricewaterhouseCoopers firms. "In this climate, regulators would feel inclined to look at anything," Shepherd says. In particular, Shepherd feels European professional service firms will balk at the acquisition, but might not get full support since PwC competitor Accenture is based in Europe.
Jim Ericson is news editor at Line56.com
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