The announcement by IBM two weeks ago that it plans to acquire the consulting arm of PricewaterhouseCoopers, highlighted the effects of the economic slowdown and recent corporate accounting scandals on the value of consulting firms.
It could also trigger further consolidation in the IT services and consulting market.
IBM plans to buy PwC Consulting for around $3.5bn (£2.3bn). The deal will see 30,000 PwCC employees join the 150,000 consulting staff that are already employed by IBM in its $35bn Global Services division.
IBM’s purchase agreement underlines the devaluation many firms have experienced in recent months. IBM reportedly considered a bid for PwCC early in 2000, but apparently decided against the move as the consulting firm would have been a hugely expensive acquisition at the time.
In September 2000, of course, Hewlett-Packard confirmed it was in talks with PwC and had offered to buy PwCC for around $18bn in cash and stocks.
That bid fell through as HP’s own stock plunged in value.
The drop in value of PwCC since then – from more than $18bn to $3.5bn – highlights the problems consulting firms face at present, particularly those associated with auditing companies. And the current economic situation goes some way to explaining why parent group PwC is prepared to accept such a comparatively low offer for its consulting business.
‘This is a good deal for both sides,’ says Mike Dodd, vice-president at analyst firm Giga Information Group. ‘IBM got it at a good price at a time when the market is deflated and at only 20% of what HP was prepared to pay just two years ago.
‘PwC Consulting, once it had decided on the direction it was heading in, had two options: the tough route of going for an IPO; or backing into another firm. As far as companies go, IBM is a good one to back into with complementary offerings.’
Dodd says the deal will worry IBM’s competitors. Services customers are veering toward larger, more established companies that offer a wide range of services and which focus on business solutions rather than technology.
IBM’s move could encourage its rivals to look anew at potential acquisitions of their own, Dodd suggests, or they may try to tighten relationships with existing services partners.
PwC Consulting had already decided to disassociate itself with the PricewaterhouseCoopers brand, and had announced that it would be spun off and floated as a separate firm called – to derision in some quarters – Monday:.
This plan was partly due to changes in US regulations governing the services that auditing firms can offer to their clients, but the need for a name change may also have been influenced by the recent spate of accounting scandals involving high-profile auditors like PwC.
The consulting arms of auditors stand to suffer through ongoing association with malpractice.
The acquisition is subject to regulatory approval, and should be concluded by the end of the third quarter.
PwCC will no longer pursue its planned initial public offering, and IBM does not plan to use the Monday or PwC Consulting brand as part of the deal.
Ease of integration, as always, will be a key factor in determining whether the merger is a success.
‘There is the potential that during the first six months following the acquisition, integration issues could lead to the new company losing a little focus, which in turn may impact on the customer,’ says Dodd.
‘But this is nowhere near the scale of the HP-Compaq merger and the companies are far more complementary. Customers may have to tough it out for the first 90 days or so, but I certainly wouldn’t advise the knee-jerk reaction of switching companies.’