For PwC, Acquisition Is Only Option

In the days and weeks leading up to the acquisition, PwC Consulting executives no doubt saw the cards playing out before them, recognizing that the hopes for a successful IPO planned for later this year were diminishing faster than its relationships with PricewaterhouseCoopers' audit clients.

During a conference call Tuesday to discuss the deal, PwC Consulting CEO Greg Brenneman told analysts that as the company studied its alternatives, "it was always clear to us that the best option was to be acquired by IBM." But Hewlett-Packard executives have already gone on record saying that they had first dibs on buying PwC Consulting, claiming in published reports that they dismissed the idea only days before the consulting firm approached IBM with a similar offer. (Ironic, of course, because HP only two years ago had considered paying $18 billion for the consulting outfit, only to come to its senses a few months later and back away from the deal.) If true, that move to sell itself a second time to HP--only this time at a bargain-basement price--gives evidence to the fact that executives at the world's second-largest business and technology consulting outfit were more than a little desperate to find a deep-pocketed suitor, be it IBM or HP, that could save it from the harsh realities of an IPO that had little chance of succeeding.

The sad part of all this is that much of PwC Consulting's woes have a lot to do with timing. For one, if the company had managed to seal the deal with HP back in 2000, its partners wouldn't have found themselves being force-fed this brand of SEC-ordered independence. And unlike competitors Accenture and KPMG Consulting, which managed to pull off IPOs at a time when the market still rewarded companies for financial performance, PwC Consulting's IPO couldn't have been more poorly timed.

For IBM Global Services, the deal makes sense--both from a solutions perspective and a financial one. For one, the addition of PwC's business consulting experience and existing client relationships is a good complement to IGS' strengths in areas like outsourcing, e-business-on-demand and application development. And getting PwC Consulting for a fire-sale price of $3.5 billion (less than the company's net revenue for fiscal 2002) is even more impressive, especially considering that only two years ago the consulting outfit's price tag floated around $18 billion.

Looking back, PwC Consulting faced a long list of obstacles blocking the road to success in the public markets, the least of which might have been the economy. The most visible sign of PwC Consulting's difficulties during the past year is its projected revenue and earnings for fiscal 2002, which ended in June. While both Accenture and KMPG Consulting launched their IPOs on the strength of growing revenue and profitability, PwC Consulting has been reeling from the effects of a bad economy. According to the company, 2002 net revenue is coming in at $4.9 billion, a full $1.06 billion lower than its 2001 net revenue of $5.96 billion. The company, in SEC filings related to the planned IPO, said that aside from economic challenges that slowed business across the entire sector, increased concerns over consultant-auditor conflict-of-interest issues in the past two years have caused revenue to shrink. And the ongoing decrease was expected to run into 2003 as well.

"Beginning in late 2000, we began experiencing an increase in the number of clients that either limit our opportunities to bid for new engagements or prohibit us entirely from bidding for new engagements because they are audited by a PricewaterhouseCoopers firm," reads the filing. "In addition, some of our existing engagements with PricewaterhouseCoopers' audit clients have been reduced in scope."

The company said the difficulties faced in signing new projects with PricewaterhouseCoopers' existing audit clients, particularly among its U.S.-based customers, significantly affected new bookings for the year. In fact, the company estimates that the average monthly bookings from U.S. clients that are also audit clients of PricewaterhouseCoopers were about 57 percent lower in the fiscal quarter ended March 31, as compared with the six months ended December 31, 2001.

"We expect the level of new business we are awarded from PricewaterhouseCoopers audit clients worldwide will continue to decline through at least the remainder of our fiscal year 2002, with a possibility of reversal beginning only after we complete our separation," continued the filing.

Then there's the fact that the company's top leadership has been in a continual state of flux, with three separate individuals holding the CEO title between January and June. (Current CEO Greg Brenneman, founder of private equity firm TurnWorks, was appointed to the CEO role in early June, replacing PwC veteran Tom O'Neill only five months after O'Neill was called up to replace Scott Hartz, who had been CEO since 1995.) And the company's CFO Frank Sowinski has only been in his role since early June. While company reps, at the time of the changes, said the leadership moves were done to make the transition to a public company as smooth as possible, the reality is that having three different CEOs in the six-month span leading up to an IPO does little to foster confidence among potential investors.

Then there's the question of the outsourcing market and the role PwC Consulting could have played in it as an independent entity. In the months leading up to the planned IPO, the company put a lot of focus on application-management and business-process outsourcing as key areas for growth as a public company. The strategy makes sense because growth in those areas has outpaced consulting and integration work, which has been slow in the past two years.

But in its most recent S-1 filing, PwC Consulting's own management team recognized the difficulties associated with expanding outsourcing and managed-services solutions, noting that: "Because our application-management and business-process management services are in the initial stages of development, we will invest capital and incur expenses, which may be significant, to implement our growth strategy to expand these services, and we may not be successful."

The filing also mentioned the fact that there are already a number of very large players in the industry that have a strong foothold in the outsourcing and managed-services space. Among them, no doubt, is IBM Global Services.