Buyout reveals industry trend

In a move to beef up its already substantial consulting services, IBM Corp. recently agreed to buy PwC Consulting for US$3.5 billion. The move will bolster IBM Global Services, which is already the industry’s leading IT services provider, with about 150,000 employees worldwide.

But it remains to be seen exactly how the move will play out for Canadian customers of both PwC Consulting and IBM. PwC Canada was unavailable for comment. IBM Canada was scarcely more forthcoming.

“What this means to Canada at this point, we don’t have those details,” said an IBM Canada spokesperson.

Despite the lack of specificity from IBM, analysts agree that this purchase is all part of a larger industry trend.

“This is all part of an enormous trend we are seeing in the consolidation of the services industry,” said Stephen Lane, research director of IT services with the Aberdeen Group in Boston. “The rich get richer,” Lane said, when asked what he thought immediately after the announcement was made. “Frankly I don’t see any significant downside.”

Jim Westcott, senior analyst with IDC Canada in Toronto, agrees the consulting arm of IBM will be a formidable opponent. “It gives them something that they haven’t really been known for before and that is high value management or strategy consultants,” he said. “It really rounds out their service offerings.”

The IBM group is best known for IT infrastructure services and IT process expertise. The PwC purchase adds much greater industry expertise and business process expertise, he said.

The purchase will also have some impact in Canada since it will reduce the number of firms that offer customer relationship management (CRM) solutions, Westcott said.

Not surprisingly Hewlett-Packard Co., which had previously looked at purchasing PwC Consulting, came down on the side of the naysayers. In a prepared statement, the company said PwC customers will perceive the partnership as a loss of independence. But analysts are not as quick to agree.

Lane, who used to consult prior to moving to Aberdeen, said “even years ago the IBM guys were pretty much free to solve the customer’s problems any way (they saw fit).”

“I really think the guys at IBM Global Services recognize it is in their best interest that they can’t be perceived always pushing IBM solutions,” he said. “This is not to say that they are not going to get in there and, whenever they can, sell an IBM product,” he added.

Ultimately it is the customers who drives the process, Westcott agreed.

“PwC will still go to market as non-vendor specific in terms of software and hardware but there may be some bias towards selling or promoting IBM gear,” he said. “They tend to try to be as neutral as they can but there certainly is (going to be) some pressure…from their [IBM] hardware counterparts.”

The acquisition remains subject to regulatory approval and the approval of regional PwC companies through partner votes. PwC Consulting and IBM said they expect the deal to close near the end of September. The move will separate PwC Consulting from Big Five accounting firm PricewaterhouseCoopers, a separation previously intended to occur through an initial public offering in August.

IBM first eyed PwC Consulting two years ago, around the time that Hewlett-Packard Co. mulled an US$18 billion buyout of the organization. HP scrapped its bid, saying later that the proposed purchase price was too high. PwC Consulting reportedly spurned an IBM offer it considered too low.

“If we go back to the originals (HP buyout) deal, PwC was hugely overvalued,” Lane said. “What IBM is paying is much more [realistic],” he said.

“The market has set a good value for this acquisition,” IBM chief financial officer John Joyce said during the conference call.

Layoffs were not discussed during the call, though IBM executives said they consider PwC Consulting’s staff the key asset in the deal. IBM is designing salary and stock compensation packages that it hopes will allow it to retain PwC Consulting’s staff and 1,300 partners, executives said.

PwC Consulting’s significant staff and client roster could help push IBM even farther ahead of its rivals – including HP.

– With files from IDG News Service