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IBM buys PricewaterhouseCoopers unit for $3.5 billion

[July 31, 2002] -- IBM moved yesterday to strengthen its consulting business with the purchase of PricewaterhouseCoopers’ global business consulting and technology services unit, PricewaterhouseCoopers (PwC) Consulting. The estimated purchase price was $3.5 billion in cash and stock.

“Our customers are looking for more than just hardware and software products,” said John Joyce, IBM senior VP and CFO. “Customers want to know how an integrated technology plan can leverage their business plan,” added Joyce, who indicated that this is the focus of IBM’s strategy under CEO Sam Palmisano.

IBM’s and PricewaterhouseCoopers’ boards have approved the deal, and the transaction is expected to conclude around the end of the third quarter, although it still must gain the approval of government agencies and local PricewaterhouseCoopers partners.

This is not the first time PricewaterhouseCoopers has looked to sell its technology consulting business to a computer house. In 2000, Hewlett-Packard (HP) Co. moved to buy the unit in a deal valued at $18 billion. That deal, the first big move on the part of Hewlett-Packard’s then-new CEO, Carleton (Carly) S. Fiorina, collapsed, as HP's stock price sagged.

IBM’s bid for the firm may be viewed as something of a fire sale, said industry observer Tony Baer, principal at onStrategies (http://www.onstrategies.com/). “What a difference a dot-com implosion and an accounting industry shakeout makes,” said Baer, noting the disparity in the values between IBM’s and HP’s offers and the rough economic torrents that have marked the last two years.

The PricewaterhouseCoopers Consulting acquisition is the first big move on the part of IBM since Samuel Palmisano took the helm in March. Prior to his ascent to CEO, Palmisano led IBM’s Global Services Division.

Buying PricewaterhouseCoopers gives IBM some breathing room in its move to stay ahead of the recently combined HP and Compaq Computing. It may also signal Palmisano’s interest in significantly expanding IBM’s services revenue. PricewaterhouseCoopers Consulting has about 30,000 employees and estimated fiscal-year 2002 consulting revenue of about $4.9 billion, excluding so-called client reimbursables.

In the wake of the purchase, PwC Consulting will no longer pursue a planned initial public offering.

“Bigger will likely be the rule at the high-end” of technology consulting in the near term, said analyst Baer, with more mergers and acquisitions expected in an already highly concentrated technology consultant industry. “Less competition at the high end of consulting will create new opportunities at the price-sensitive lower end,” said Baer.

About the Author

Jack Vaughan is former Editor-at-Large at Application Development Trends magazine.

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