IBM to buy PwC Consulting for US$3.5 billion

IBM Corp. has agreed to buy PwC Consulting for US$3.5 billion in cash and stock, the companies announced Tuesday. The move will separate PwC Consulting from Big Five accounting firm PricewaterhouseCoopers (PwC), a separation previously intended to occur through an initial public offering (IPO) in August.

PwC Consulting, which has 30,000 employees worldwide and annual consulting revenue of around US$4.9 billion, will be combined with IBM Global Services’ Business Innovation Services division to create a new unit, the companies said. Ginni Rometty, now general manger of IBM Global Services Americas, will become general manager of the new unit, IBM said.

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.

PwC Consulting had been on track for an IPO intended to raise as much as US$1 billion and a name change to Monday. Serious talks with IBM commenced just 10 days ago, PwC Consulting Chief Executive Officer (CEO) Greg Brenneman said during a conference call with analysts. The fit between the two companies was immediately obvious and “almost like magic,” he said.

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.

The current market downturn made this an attractive time for IBM to go shopping.

“The market has set a good value for this acquisition,” IBM Chief Financial Officer John Joyce said during the conference call.

IBM does not expect the acquisition to prompt layoffs, according to IBM Global Services Vice-President of Strategy Ralph Martino.

“We may find some synergies and systems overlap, and we’re always trying to find ways to be more efficient, but we’re not expecting anything major there,” Martino said in an interview. “We really want to fully deploy all the new people.”

After missing analyst earnings estimates at the end of its second quarter for the first time in more than a decade, IBM began trimming some of its global workforce of 320,000. More than 2,000 employees have been laid off from IBM Global Services since May, according to an IBM employees’ union.

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 during the conference call.

Brenneman, PwC Consulting’s CEO of less than two months, will leave once the IBM deal is consummated and return to running TurnWorks Inc., a Houston-based company specializing in corporate turnarounds.

IBM will pay for PwC Consulting with US$2.7 billion in cash, with the remainder of the US$3.5 billion purchase price composed of stock and convertible notes. IBM expects the acquisition to shave US$0.30 off its fourth-quarter per-share earnings, Joyce said, with some revenue gains coming shortly after the deal’s close and income gains emerging by the end of 2003.

While integration teams are already at work, according to executives, Martino said that detailed discussions with customers about transition plans will have to wait until after the acquisition’s close.

IBM Global Services is the industry’s leading IT services provider, with about 150,000 employees worldwide.

PwC Consulting’s significant staff and client roster could help push IBM even farther ahead of its rivals – including HP. Gaining services bulk to compete more effectively against IBM was a key rationale offered by HP CEO Carly Fiorina for the company’s merger with Compaq Computer Corp.

Particularly attractive to IBM is PwC Consulting’s industry-focused approach, with services and software packages tailored to markets such as financial services and retail, Martino said. The company’s expertise with customer relationship management (CRM) and enterprise resource planning (ERP) software from Oracle Corp., Siebel Systems Inc. and SAP AG – all PwC Consulting partners – will complement IBM’s existing strengths, he said.

But PwC Consulting’s alliances with IBM rivals such as HP and Electronic Data Systems Corp., which holds the number two spot behind IBM in the IT services market, are unlikely to survive the organization’s planned absorption by Big Blue, executives acknowledged.

“We would like to continue consulting and systems integration work (with IBM competitors), but we think the likelihood is slim,” Joyce said. “We will see where that takes us.”

HP representatives could not immediately be reached for comment, but in a prepared statement the company said it passed up the opportunity to buy PwC Consulting in recent months.

“Customers want an alternative to IBM. This announcement does not change that and in fact may make customers even more anxious to source an alternative,” HP said.