IBM grabs PWC for $3.5 billion

IBM, the biggest provider of services to help companies install and run computer systems, has agreed to buy PricewaterhouseCoopers' consulting arm for an estimated $3.5 billion, the companies said Tuesday.

The transaction is subject to regulatory approvals, but both companies' boards have approved the measure. The deal is expected to close in the third quarter.

The acquisition by IBM, which already has huge presence in the consulting market, will likely affect other companies such as Sun Microsystems, Dell Computer, Hewlett-Packard and EDS that have sought to beef up their own services, said Illuminata analyst Jonathan Eunice.

"As we studied our options, it was always clear to us the best option was to be acquired by IBM," PwC Consulting Chief Executive Greg Brenneman said in a conference call with financial analysts.

IBM Global Services had $35 billion in revenue in 2001, but the acquisition will bolster an area of comparative weakness, planning and installing high-end software for corporate accounting, dealing with customers, and managing corporate supplies, said Forrester Research senior analyst Christine Ferrusi Ross.

"It takes a very available bachelor out of the mating game," Eunice said. "PwC Consulting was clearly on the block and being shopped around."

As an incentive to keep PwC Consulting employees from leaving, the deal offers them stock options greater than what they could have owned through the IPO.

IBM will pay for the acquisition with $2.7 billion in cash from reserves and current cash flow, supplemented with a $400 million convertible note and $400 million in stock, said IBM Chief Financial Officer John Joyce in the conference call. The charge for the acquisition will lead to a decrease of 30 cents per share, or possibly somewhat less, in the fourth quarter, Joyce said.

"The timing of this acquisition is excellent," Joyce said. "The market has set a good value on this acquisition."

The acquisition will boost IBM earnings by the fourth quarter of 2003, IBM said, but that increase likely will be about offset by a decrease in the first half of 2003, Joyce said.

Indeed, HP in 2000 tried to buy PwC Consulting for about $18 billion, but later dropped the bid, saying the price was too high.

"Everyone is less valued right now. Everybody was buying with highly inflated 'Monopoly' money two years ago," Eunice said.

As a result of the deal, PwC Consulting no longer will pursue an earlier planned initial public offering, the companies said. PwC Consulting has 30,000 employees and expected revenue of $4.9 billion for its fiscal 2002, which ended June 30.

Under the acquisition terms, PwC Consulting will become a part of IBM Global Service's Business Innovation Services unit. Ginni Rometty, currently general manager of IBM Global Services in the Americas, will lead the new unit.

Brenneman will work to hand off his company to IBM, he said, and "after that I'm going to go back to my private equity firm."

IBM has been hurt by the recession and reduced spending on information technology, but its Global Services unit has helped reduce the pain by providing somewhat stable revenue. Customers often sign long-term contracts under which IBM supports or even runs clients' computing operations for recurring fees.

"IBM is strong in a down economy. It can weather the storm so much better than anyone else, so it is obviously shopping for value," Eunice said.

IBM Global Services has about 150,000 employees and operations in 160 countries.

Consulting companies help companies install complex high-end servers and software and integrate new systems with existing systems. Often a company will cultivate a certain area of expertise, such as installing SAP's accounting and business software, for example.

But spending on services such as consulting has been under pressure, Forrester's Ross said. "The services market as a whole is still in difficult shape right now," she said.

Consulting engagements have dropped in scale and price, she said, to an average of $250,000 and three months, she said. As a result, there often is incentive to push toward selling outsourcing--running its clients' computing operations for them--which can provide longer-term, more stable revenue.

Ross said IBM will face this balancing act as it integrates PwC: "If you're an IBM salesperson, are you going to sell outsourcing or are you going to sell a consulting deal?"

The PwC Consulting revenue will drop because of the expected end of partnerships the company had with IBM competitors such as Sun Microsystems and HP.

"We would like to continue to do consulting and systems integration work for our competitors, though we think the likelihood of that is slim," Joyce said.

Financial auditing companies such as PwC often have had separate consulting divisions, but there is growing concern that auditors would overlook clients' problems to avoid jeopardizing lucrative consulting contracts.

IBM's purchase of PwC Consulting "will unleash the consulting unit from the regulatory restraints of our industry, and will allow the business to reach its full potential," PwC Chief Executive Samuel DiPiazza said in a statement.

IBM rivals such as Sun and HP have increasingly focused on partnerships with consulting companies.

As part of its separation from the accounting firm, PwC Consulting had planned to rename itself "Monday" when it finished its split from PwC. The name drew criticism from analysts, who noted the unfavorable connection the day has with many in the working world.