IBM Buys PwC Consulting For $3.5 Billion

IBM Global Services

"It was really only ten days ago we started talking," said Greg Brenneman, the outgoing CEO of PwC Consulting, which recently spent millions of dollars on a now-moot advertising campaign to change its name to Monday. The consulting and integration firm is projecting 2002 revenue of $4.9 billion for the fiscal year ended June 30.

IBM's "view of the market and view of the customer is the same as ours," Brenneman said, adding that he intends to stay on only through the acquisition's transition period.

On a conference call with financial analysts Tuesday to share more detail about the pending $3.5 billion deal, IBM and PwC Consulting executives reminded analysts that IBM had made a bid for PwC Consulting in 2000. Yet "we could not justify the margin at that time," said IBM CFO and Senior Vice President John Joyce.

In 2000, PwC Consulting was on the table for about $18 billion. Neither IBM nor Hewlett-Packard, which bailed on its own bid to buy PwC Consulting that year, had the stomach to complete the deal in what were, in hindsight, the early stages of the bear market on Wall Street.

By that measure, IBM is getting a bargain in the $3.5 billion in cash and stock it is paying for PwC Consulting and its 30,000 employees, observers said. It is not clear how many of the PwC staffers will be added to IBM Global Services' Business Innovation Services [BIS unit, one of three groups within IGS.

The combined entity will be headed by Ginni Rometty, who now serves as general manager of IBM Global Services' Americas division. Rometty will report to Doug Elix, senior vice president and group executive of IBM Global Services.

Solution providers, some of whom look ever more skeptically on IBM's services arm and what they say are its efforts to compete with them, were cautious after they heard the news.

Mark Romanowksi, senior vice president of client services and business development at solution provider AMC, was wary. "I would hope that there may be additional partnering/alliances opportunities as a result, but I am not holding my breath," he said.

IBM CEO Sam Palmisano and other top IBM executives have said that IBM Global Services will pass to partners leads on business in enterprise accounts that have $100 million or less in annual revenue. Yet the PwC Consulting deal raises new questions about whether that pledge will hold, considering that IGS' BIS unit is the one solution providers most frequently encounter in competitive bidding situations.

IBM Global Services knows which side its bread is buttered on. Some "80 percent of our profits come from software and services," Joyce said Tuesday.

Forrester Research's Christine Ferrusi Ross referred to the deal as a "mega-acquisition."

In recent months, "PwC Consulting has moved very significantly into the application outsourcing space," she said. "Clearly, the integration market and the consulting market have dried up, so PwC, Accenture and KPMG have all been talking an awful lot about their outsourcing practices."

Indeed, executives on the call Tuesday emphasized time and again the outsourcing expertise--as well as the CRM and supply chain know-how--that PwC Consulting brings to bear.

The acquisition by IBM accounts for the last piece in the former PricewaterhouseCoopers' consulting business, which it exited this year after accounting scandals roiled the markets and shook investor confidence to its core.

In 2001, PricewaterhouseCoopers sold its U.S. corporate value consulting business to Standard and Poor's for $120 million, and its human resources outsourcing business, Unifi Network, to Mellon Financial for $275 million.

MARIE LINGBLOM and EDWARD F. MOLTZEN contributed to this story.