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.

clients like Oracle and HP can hardly be expected to continue to stick
around under IBM’s ownership, given the direct conflict of interests

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

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.


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