IBM in a bold stroke Tuesday announced its acquiring PwC Consulting, in a cash-and-stock deal valued at about $3.5 billion.
The deal to acquire PricewaterhouseCoopers business and technology consulting practice will give IBM a big boost in vertical industry expertise as well as in major business applications consulting and implementation services around Enterprise Resource Planning, Customer Relationship Management and Supply Chain Management, according to Doug Elix, senior vice president and group executive for IBM Global Services (IGS).
“PwC provides deep industry knowledge, leading business solutions and strong business relationships critical for fusing IT with business,” said Elix, who added that PwC is the top ERP services provider as well as a leader in CRM and supply chain services. “The PwC acquisition underscores IBMs commitment to its strategy and brings this capability to a new plateau.”
Although IBMs growth strategy has not relied on acquisitions but instead on organic growth, it has seen a falloff in the growth of its consulting operation for the past several quarters. PwC Consulting, which will become a part of IGSs Business Innovation Services unit, will change that.
IBM had held acquisition talks with PwC in 2000, but could not agree upon a deal. Time has changed that, however. “I think IBM benefited from a convergence of factors – accounting scandals, the need for better consulting and business process outsourcing capabilities, and it looks like the price was right,” said John Madden, senior analyst at Summit Strategies Inc. in Boston, Mass.
PwC Consulting expects to achieve revenues in fiscal 2002 of $4.9 billion and an operating profit margin of about 4 percent. IGS will also inherit some 30,000 employees.
Although IBM expects to take an earnings-per-share hit of about 30 cents in its fourth fiscal quarter for the acquisition, it also anticipates some immediate benefits, according to John Joyce, senior vice president and CFO at IBM. These benefits include “cost synergies derived from using IBM corporate resources, new drivers of revenue across IBM” and greater potential growth by eliminating the conflict between the auditing and consulting sides of the business.
“We think we will start to see immediate improvements in our revenues relative to other services business with the customers that were audit clients of PwC. Some PwC consulting clients are competitors, and we expect that revenue will drop off,” said Joyce. He predicted that the combined unit, headed by Ginni Rometty–now general manager of IBM Global Services Americas–will contribute double-digit market growth for the fiscal 2004 year.
The deal, which completes the separation of consulting and auditing practices sought by PricewaterhouseCoopers, has already been approved by both companies board of directors, and the two companies plan to fast-track the closing within the quarter.
“We view this as a real game changer in the industry. Nobody else has this capability. Our customers are asking for help to change their business processes to become more competitive in their marketplaces and (for help in) how to use technology to do that,” concluded Joyce in a conference call this afternoon.
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