IBM Corp reasserted its position at the top of the IT services market by buying PwC Consulting for $3.5bn yesterday,Joe Fay writes
The computing giant's own Global Services business has seen growth slow of late, but the deal means IBM will inherit additional services revenues of around $4.9bn a year and 30,000 employees, including 1,300 partners.
The takeover widens the gap between Big Blue and Hewlett-Packard Co, which expanded its own services business through its takeover of Compaq Computer Corp earlier this year. It also seems likely to force a series of realignments between vendors and services firms - PwC has strategic relationships with a number of IBM's competitors including HP and Sun Microsystems Inc.
Lastly, by clinching the deal IBM also gets to thumb its nose at its rival - HP agreed to pay $18bn for the PwC business at the peak of the tech boom, before the beginnings of the IT downturn forced the Palo Alto, California-based firm to drop its offer. Now, even as the market is thought to have bottomed out, it is IBM that has been able to grab the services company at a bargain price.
PwC had been expected to go for an IPO this year, and had even decided on a new name, Monday. However, Greg Brenneman, president and CEO of PwC Consulting, said yesterday that an acquisition by IBM had always been the preferred option for the company.
John Joyce, IBM's CFO, said the company had first considered a bid for PwC in 2000, but at the time, "could not justify the valuation." However, he went on, "the current market has created a unique opportunity for both parties to come to mutually acceptable terms."
Joyce said that the deal underscored and would accelerate IBM's services strategy, of delivering "superior business value to clients through the integration of technology and business insight."
IBM bluntly stated yesterday that PwC Consulting would be subsumed into the greater IBM services organization. Doug Elix, senior vice president and group executive of IBM Global Services said PwC Consulting will be combined with IBM Global Services' Business Innovation Unit, forming a new global unit, headed up by Ginni Rometty, currently general manager of IBM Global Services Americas.
While the acquisition will knock around 30 cents off IBM's earnings per share in the fourth quarter, the IT giant expects the deal to boost its services revenues immediately and to be accretive to earnings by the end of next year. By the end of 2004, IBM is banking on the unit to deliver double digit revenue growth at "a profit margin comparable to the rest of IBM Global Services."
Joyce said that PwC Consulting's growth had been hit by increasing concern over auditor/consulting conflicts. Around half of PwC Consulting's clients are also auditing partners. Being acquired by IBM removed this constraint, Joyce claimed.
However, Joyce also admitted that some of PwC's revenue generating partnerships might not survive the transition. The company has a web of partnerships with IBM competitors, including BEA, HP and Sun. Joyce said yesterday that, "We would really like to continue consulting and systems integration for our competitors, although we think the likelihood of that is slim."
HP said late yesterday that it too had been offered the opportunity to buy the PwC business over recent months but had decided not to. It said the business represented a tough integration challenge because of the partnership model, while customers would percieve the deal as depriving the PwC business of its independence. HP claimed it would have an advantage in being able to partner with a range of consultants and systems integrators.
The deal still must be approved by PwC's partners, and will also be subject to regulatory approvals. IBM will be paying for the company with $2.7bn in cash, $400m in a convertible note and $400m in stock.