Hardware vs Consulting

IBM is all set to acquire PriceWaterhouseCooper’s (PwC’s) global business

consulting and technol- ogy services division, PwC Consulting (PwCC), for an

estimated $3.5 billion in cash and stock. The two companies have signed a

definitive agreement, approved by IBM’s board of directors and PwC’s

leadership board. PwC Consulting and IBM’s Business Innovation Solutions will

form a new unit within IBM Global Services. The transaction is, of course,

subject to regulatory approvals and the approval of local PwC firms through

votes of their partners. Formalities of the deal are expected to be completed by

September 30, 2002 – but the transition and integration is likely to continue

till the end of 3Q02. The new outfit is to have 55,000 employees and generate

around $13 billion in annual revenue. Ginni Rometty, general manager of IBM

Global Services (America), will be general manager of the new unit.

So far, IBM had not been clear about its intentions to invade the business

process outsourcing (BPO) space. With this acquisition, the company now has the

potential to establish a credible capability in BPO. It can provide lifecycle

services starting from need assessment and ‘business fit’ to deploying

solutions, managing and evolving the next round of services. But why is PwC

aborting its scheduled $1 billion IPO and a new life as Monday Inc by selling

the consulting division at a throw-away price? And how did IBM manage to strike

the deal and how does it benefit from it?

PwC Consulting’s APAC COO, Andrew Stevens claims that the goal was to hive

off the consulting arm through the best possible deal. "The PwC leadership

thinks this is it," he says, adding,"PwC and IBM have been in

negotiations since July 18 2002, following a brief exchange of information and

discussion with the SEC. Yes, we had been working diligently toward an IPO in

August. At the same time, PwC continued to explore other alternative options,

such as an acquisition."

"Our primary driver has been the legal separation of PwC Consulting that

would enable this business to flourish, free of auditor-independence-related

constraints. The transaction with IBM achieves this goal," continues

Stevens. As far as clients of PwC are concerned, the most important change will

be for those serviced by Oracle or HP-Compaq, as they can hardly be expected to

be continue under IBM’s ownership given the direct conflict of interests.

According to Greg Brenneman, president and CEO , PwC Consulting, "Given

the global economic situation, according to Brenneman, the current selling price

of $3.5 billion is a hefty 40% premium to what it would have garnered in an IPO.

While the exact valuation was not yet done, Brenneman informed the media that an

IPO would have valued the company at around $2.5 billion, based on the

valuations of Accenture and KPMG.

HP almost bought PwCC for an astronomical $18 billion price tag two years

ago. A big concern in 2000 was about how credible a top consulting firm would

remain once it was absorbed into a systems vendor like HP. The same question

arises with IBM. If PwC Consulting becomes part of IBM, would customers credit

it with impartial, platform-independent consulting? IBM Services may say it’s

hardware-agnostic, but the bulk of its new projects, by value, involves IBM

hardware.

Says Stevens, "IBM and PwC consultants will continue to offer objective

advice. For example, 45% of the servers running in IBM data centers are not IBM

servers." IBM’s country manager, corporate communications VarshaChainani

on being questioned about the new entity’s name says it will be "united

under the IBM brand, though a specific name for the new IBM organization has not

been selected yet."

PwCC India is completely owned by Indian partners, who were getting ready for

a solo spree, when the deal happened. Stevens says, "We will continue to

assess resource levels in the light of market conditions and skills requirements

as we engage in the integration process," not exactly ruling out the

possibilities of streamlining.

SUDARSHANA BANERJEE



CNS