Everyone wins in this transaction: PwC Consulting chief

Prasanto K Roy & Sudarshana Banerjee

NEW DELHI: The accounting major explains why IBM’s Monday shopping, just ahead of PwC Consulting’s IPO, is good for PwC too. IBM is all set to acquire PricewaterhouseCoopers’ (PwC) global business consulting and technology services division, PwC Consulting, 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 (30,000 employees and $5 billion revenue, excluding client reimbursables) 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 approval of local PwC firms through votes of their partners. Formalities of the deal are expected to get over by September 30, 2002, but the transition and integration is likely to spill over till the end of Q3 of 2002. The new outfit is expected to have 55,000 employees and circa $13 billion in annual revenue. Ginni Rometty, currently general manager of IBM Global Services - America, will become general manager of the new unit and would be reporting to Doug Elix, senior vice president and group executive, IBM Global Services.

Two years ago, HP almost bought the division from PwC but for the astronomical $18 billion price tag. (HP has come a long way since then, re-working its strategy to work with a number of systems integrators such as PwC rather than becoming the systems integrator itself). Two years later, why is PwC now selling at a bargain-basement price, aborting a scheduled $1 billion IPO and a new life as Monday, Inc.? Andrew Stevens, APAC COO, PwC Consulting said that the goal was to hive off the consulting arm through the best possible deal. "The PwC leadership thinks this is it," he said.

"PwC and IBM have been in negotiations since July 18, 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 a 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", Stevens said. Stevens also added that a PwC Consulting hived off and merged into IBM Global Services will be able to grow business with existing clients, and "win back" those lost due to auditor independence-related constraints, and pursue aggressive marketing.

According to Greg Brenneman, president and chief executive officer of PwC Consulting, "Everyone wins in this transaction – our clients, our employees, and IBM." Given the global economic situation, according to Brenneman, the current selling price of $3.5 billion is a hefty 40 percent 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 likely have valued the company at some $2.5 billion, based on the valuations of Accenture Ltd and KPMG, two other kids in the block. (Interesting to note here that Brenneman himself, a former Bain & Co consultant who made his bones salvaging the bankrupt Continental Airlines in the mid 1990s, and who is now about to resign as the PwC’s chief executive after just two months on the job, loses out on stock options for a public PwC consulting business. And has in the process got kudos from the corporate citizens of the world for putting PwC deals ahead of his personal gains. However, as his enemies might want to point out, lavish stock options are under attack from Main to Wall Street anyway, and this would translate into all the more recommendations for his next stoppage at TurnWorks, Brenneman’s three-partner Houston consulting firm).

IBM, when asked how it negotiated this price, responded, "Other than to say that the market conditions are vastly different today than they were two years ago, we are not discussing the specifics of the purchase price." 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 remains with IBM. If PwC Consulting becomes 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 hardware.

Said Stevens, "IBM and PwC consultants offer objective advice today, and will continue to do so long after this transaction closes. For example, 45% of the servers running in IBM data centers are not IBM servers." Varsha Chainani, IBM India’s corporate communications manager said that the takeover would create "a new and unique organization to assist clients in using IT to improve business performance -- all the way from innovative thinking to implementation and operation."

With the Monday IPO and plan aborted, what will be the merged entity be called? IBM’s Chainani says it will be "united under the IBM brand, though a specific name for the new IBM organization has not been selected yet." And how will this affect PwC in India? Neither PwC nor IBM appears to be certain about the immediate impact in India, where PwC has some 1,200 developers in its Salt Lake, Calcutta, facilities, and IBM has 3,100 developers across India. At press time, we did not get a clear idea of how many of those PwC developers, if any, would move to IBM India.

"The goal of this transaction is to expand business and complement skill-sets that may not be in place at either organization separately - so far our work shows how complementary our capabilities are," Stevens said.

Any retrenchments likely in India? "As any prudent business would do in a transaction of this nature, we will review areas of synergy as well as duplication between the two organizations. While we believe that our current staffing levels support today's business model, we will continue to assess resource levels in light of market conditions and skills requirements as we engage in the integration process" Stevens said.