Acquisition of PwC Consulting would bolster IBM's federal presence

PwC Consulting won't be going public after all.

The company announced July 30 that instead of spinning off from its parent company, New York accounting firm PricewaterhouseCoopers LLP, PwC Consulting would instead be bought by information technology giant IBM Corp. of Armonk, N.Y., for $3.5 billion in cash and stock.

PwC Consulting, a business consulting and technology services firm with 30,000 employees, had planned an August $1 billion initial public offering of stock and had announced a name change to Monday, and a move of headquarters from New York to Hamilton, Bermuda.

The IBM purchase is subject to regulatory approval and approval of PwC Consulting partners, and is expected to be final at the end of September, the two companies said.

The addition of PwC Consulting would boost considerably IBM's federal information technology business. PricewaterhouseCoopers ranked No. 46 on Washington Technology's list of top 100 federal IT vendors for 2001, taking in $128.3 million in federal prime contracting dollars that year. The company had income of $7.5 billion for the fiscal year ended June 30, 2001, including government and services revenue of $1.14 billion.

IBM ranked no. 23 on Washington Technology's list this year with $291.2 million in federal prime contracting dollars in 2001.

PwC Consulting serves several industry sectors, including producers such as pharmaceutical and retail goods, government services, financial services, communications and entertainment and energy and utilities. Its work includes customer relationship management, supply chain and operations, information technology and business process outsourcing.

PwC Consulting's large contracts include a 10-year job worth up to $328.4 million to develop and test a single, unified system that will combine Medicare's accounting operations. The contract award was announced in September 2001. In December 2000, the Army awarded PwC Consulting a five-year, $453 million e-learning contract to provide distance education for about 80,000 soldiers via the Internet.

In March, PwC Consulting, with Electronic Data Systems, Sun Microsystems and Oracle Corp., launched the National Integrated Security Suite of IT solutions to improve transportation security. The suite biometric and risk assessment technologies. Its Known Traveler and Secure Employee solutions are designed to establish identity and assess security risks.

PwC Consulting will be combined with the Business Innovation Services unit of IBM Global Services, creating a new global unit. Ginni Rometty, general manager of IBM Global Services-Americas, will become general manager of the new unit, reporting to Doug Elix, senior vice president and group executive of IBM Global Services.

"Our consulting and services professionals will provide a powerful capability beginning with business innovation and extending through implementation," said Samuel Palmisano, IBM president and chief executive officer. "Together with the world-class innovations of IBM Research and our business partner offerings, this new business unit will deliver comprehensive end-to-end business and technology solutions."

IBM said its Global Services unit is the industry's largest business and information technology services provider, with approximately 150,000 professionals serving customers in 160 countries and revenue of $35 billion in 2001. The acquisition of PwC Consulting makes it even more of a services powerhouse. PwC Consulting estimated its fiscal year 2002 consulting revenue at $4.9 billion, excluding client reimbursables.

John Joyce, IBM's senior vice president and Chief Financial Officer, said the company had first considered buying PwC Consulting more than two years ago, but found it overvalued. In September 2000, Hewlett-Packard Co. proposed buying PwC Consulting for $18 billion.

"The current market has created a unique opportunity," Joyce said.

Either going public or becoming part of another company will relieve PwC Consulting of potential conflicts of interest when the same firm provides both auditing and consulting services.. In its May 2 registration statement with the Securities and Exchange Commission, PwC Consulting cited government and media scrutiny of such relationships, particularly after the high-profile bankruptcy of Houston energy firm Enron Corp.

"In the Enron situation, governmental authorities and the media are investigating whether the management consulting fees paid to Arthur Andersen compromised its role as Enron's independent auditor," the statement said. "The independence disclosure rules and the fallout from the perceived conflicts of interest in the Enron situation are significantly limiting our ability to compete."

Samuel DiPiazza Jr., chief executive officer of PricewaterhouseCoopers, said the deal with IBM "fulfills our commitment to fully separate PwC Consulting from PwC. It will unleash the consulting unit from the regulatory restraints of our industry, and will allow the business to reach its full potential."

In its SEC registration statement, PwC Consulting estimated that its average monthly bookings from clients that also are audit clients of PricewaterhouseCoopers firms were about 57 percent lower in the fiscal quarter ended March 31, 2002, compared to the six months ended Dec. 31, 2001.

IBM's purchase also removes from PwC Consulting the threat of lost government business resulting from its planned relocation to Bermuda. In recent weeks, Congress has indicated considerable support for legislative proposals that would prevent U.S. companies that reincorporate offshore from being awarded federal contracts.

Several management and technology consulting firms have split from their auditing and accounting parent companies in recent years. Andersen Consulting and KPMG Consulting Inc. went public, however. Andersen Consulting changed its name to Accenture; KPMG Consulting plans to change its moniker as well.