IBM Picking Up PWC Consulting In $3.5 Billion Deal

• Inside IBM Global Services
• Inside PWC Consulting
• For PwC, Acquisition Is Only Option
• IBM's Martino: PWC Acquisition Not About Scale
• The acquisition, which the company expects to close by the end of the third quarter and become cash positive next year, will add 30,000 more employees to IGS' stable of consultants. The consulting firm will become part of IBM's global Business Innovation Services unit.
• "Today our strategy is clear," said Doug Elix, senior vice president and group executive of IBM Global Services, during a call with analysts late Tuesday to announce the deal. "We have the right business model and now an even stronger team. Our acquisition of PWC Consulting has just raised the bar of what we can deliver to our customers."
• The $3.5 billion purchase price, which is approximately one-tenth of IGS' 2001 revenue of $35 billion, will include $2.7 billion in cash, $400 million in a convertible note and $400 million in convertible stock, said IBM executives.
• This new unit will leverage IGS' existing services offerings to offer clients solutions that combine business and technology consulting, industry insight and business process expertise.

• "What we see in PWC Consulting is a leading management consulting firm with key business insight and business process outsourcing capabilities, a set of blue chip clients, significant revenue and cost synergies, key service offerings around CRM, ERP and human capital solutions, as well as SAP-based applications," said IBM CFO John Joyce.
• Greg Brenneman, president and chief executive officer of PwC Consulting, said the major benefit for his firm and its employees is that the deal "unleashes PWC Consulting from the independent constraints it operated under as part of an accounting firm."
• "As we studied our options, it was always clear to us that the best option was to be acquired by IBM," he said. "This acquisition will not only allow the business to flourish but will create a new and unique capability, unmatched in the industry."
• The announcement comes only weeks before PWC Consulting had planned to go public with an IPO and change its name to 'Monday.' But the bad economy and an unfriendly stock market, as well as a number of other factors, had caused some industry watchers to predict in recent weeks that the IPO would not go off as hoped.
• IBM executives told analysts that they first considered buying PWC Consulting two years ago but could not justify the company's high valuation at the time. "However the current market has created a unique opportunity for both parties to come to mutually acceptable terms," said Joyce.
• For its fiscal year 2002, which ended in June, PWC Consulting said it brought in net revenue of $4.9 billion, with gross profit margin of about 29 percent and operating profit margin of about four percent.
• Joyce told analysts IBM is expecting several immediate benefits from the acquisition, including cost synergies derived from operating within IBM infrastructure and corporate resources, benefits from the change-over from the PWC Consulting partnership model, as well as new revenue drivers within IBM. "In addition, market concerns about auditor and consultant conflicts have recently impacted PWC's growth," he said. "Their joining IBM resolves this concern."
• With restructuring charges, IBM expects the transaction to reduce earnings per share by almost 30 cents in the fourth quarter of 2002, but it believes the acquisition will be accretive to earnings by the fourth quarter of 2003. By the end of 2004, the company expects the PWC Consulting unit to contribute double-digit revenue growth "and a profit margin comparable to the rest of IBM Global Services."
• IBM's surprise announcement is not the first time in recent years that a major hardware manufacturer has eyed PWC Consulting as a way to beef up its own services portfolio. Hewlett-Packard made headlines two years ago with a plan to purchase the consulting company, only to back out several months later saying the price tag was too steep.
• The PWC Consulting unit, which will become part of IGS' Business Innovation Services unit, will be headed up by Ginni Rometty, currently general manager of IBM Global Services -- Americas. Rometty will become general manager of the new unit, and will report directly to Elix.
• Brenneman, who was recruited to head PWC Consulting earlier this year, said he will stay on to help coordinate the integration of the two firms and will leave after the acquisition is complete to return to TurnWorks, the private equity firm he founded in 1994.