IBM pulls off coup with PwC buy
IBM Global Services will expand by 30,000 with PwC's consultancy arm.
Companies and their customers have much to gain from IBM's proposed buyout of PwC Consulting, but the deal is not without operational challenges, experts say.
Melding different business cultures, retaining key executives and aligning IT knowledge and procedures won't be easy, says Joseph Marino, director of Internet commerce and e-business solutions at Current Analysis. "In conception it is right on," he says. "But the execution is far off."
The proposed deal announced last week calls for IBM to acquire PricewaterhouseCoopers' global business consulting and technology services unit, PwC Consulting, for $3.5 billion in cash and stock. That figure represents just 71% of PwC Consulting's $4.9 billion fiscal 2002 revenue and is considerably less than the $18 billion that Hewlett-Packard considered paying for PwC Consulting a couple of years ago.
On the plus side for IBM is PwC Consulting's business process expertise. Many of today's professional services clients want a single source for technology, operations, business strategy and services delivery, Marino says. IBM with its hardware and software heritage excels at building network infrastructure, integrating systems and managing applications, whereas PwC's strength is that it understands the business processes in different vertical industries and takes a more unified approach to technology and business requirements, he says. "When they put in an IT infrastructure system, they actually are doing change management at the same time," Marino says.
IBM services offerings often are seen as "simply a Trojan horse," and a means to sell proprietary hardware, Marino says. "What PwC Consulting does is give them real credibility as a business-process-based, vertical-industry-focused consultancy group."
The acquisition also will offer IBM inroads into some desirable markets.
"From an enterprise software perspective, this is a coup for IBM, which has been struggling to build a PeopleSoft practice for some time," AMR Research says in a research brief published last week. PwC Consulting's life sciences and pharmaceutical expertise will be a welcome addition, according to the research firm.
PwC Consulting, meanwhile, gets to gracefully bow out of its plans for an August IPO of stock, along with its proposed name change to "Monday."
With PwC Consulting expecting 2002 revenue to be down roughly 27% from 2001, "the prospect of an August IPO was looking sketchier by the minute," AMR Research says.
PwC gains an accomplished sales team, Current Analysis' Marino says. Once ties to PricewaterhouseCoopers' auditing business were severed formally, PwC Consulting was going to be forced to develop a sales culture and sales mechanisms, Marino says. Now it doesn't have to.
"This acquisition is a superb move for IBM," says Jeff Wenger, CTO at Tax Technologies in Bradenton, Fla. Tax Technologies provides a suite of Web-native tax and financial reporting applications. IBM Global Services hosts Tax Technologies' software and is responsible for maintaining connectivity, managing server farm security and backing up client data.
"In addition to a modest acquisition price, the current market demands financial reporting and systems integration expertise - some strengths of PwC Consulting," Wenger says. "At the same time, the practice leaders of PwC Consulting maintain a blue-chip brand and have the opportunity to expand their services on the e-business side."
Opportunities notwithstanding, IBM and PwC will have to tackle some business hurdles.
One obstacle is channel conflict. Current PwC Consulting technology partners' products overlap with proprietary IBM products, especially in the e-business infrastructure, IT infrastructure and networking areas, Current Analysis says. In addition, IBM faces channel conflict with other professional services firms such as Electronic Data Systems (EDS), whose network infrastructure is used by PwC Consulting.
"A lot of PwC customers were not using IBM technology, and might be using EDS' or [Computer Sciences Corp.'s] outsourcing services," Marino says.
IBM acknowledges that there are competitive concerns.
"There are competitive relationships that will be dealt with here. But the marketplace is used to that and so are we," says Ralph Martino, vice president for strategy and marketing at IBM Global Services. "It will all get sorted out. We're not worried about it."
Other challenges include:
plus PwC Consulting|
The PwC Consulting acquisition makes IBM the largest consulting, systems integration and professional services firm.
Tax Technologies' Wenger says he isn't worried about his company's relationship with IBM or hiccups in service as the two consulting divisions are integrated. "None of the services leveraged by us are offered by PwC Consulting today, and our efforts are complementary not competitive to PwC Consulting," he says.
IBM's Martino predicts a smooth transition - once the acquisition is completed, which is expected by the end of the third quarter. "It should be pretty straightforward for us to integrate the two teams, and to have, quite honestly, the same people who were visible to the customers before continue to be visible," he says. "The only difference is they will come to them as one IBM team."
PwC Consulting will be absorbed into a yet-to-be-named new business unit within IBM Global Services. The new unit will combine the roughly 30,000-employee Business Innovation Services unit within IBM Global Services and the 30,000-employee PwC Consulting. Ginni Rometty, now general manger of IBM Global Services Americas, will become general manager of the new unit.
Senior Writer Jennifer Mears contributed to this story.