re: IBM gets bigger
>> IBM to Buy Pricewaterhouse Consulting
Caroline Humer
Reuters UK
Armonk, N.Y.
31 July, 2002
01:13 BST
International Business Machines Corp. on Tuesday made its largest acquisition ever, saying it would buy PriceWaterhouseCoopers Consulting for $3.5 billion in cash and stock.
The purchase is aimed at boosting slowing revenues in the computer giant's large services business, which now accounts for more revenue than its well-known computers and mainframes.
Armonk, New York-based IBM is paying only a fraction of what its competitor Hewlett-Packard Co. HPQ.N had bid in 2000 for the unit -- $18 billion. HP later pulled out of those talks and PriceWaterhouseCoopers [PWC.UL] said at the time it would carry on with its plan to split itself in two.
Under that plan, PriceWaterhouseCoopers had initially hoped to raise as much as $7.5 billion to $9 billion, but its value has since dropped considerably with the tumbling stock market.
It also marks the first major acquisition under IBM's new Chief Executive Samuel Palmisano, who took over on March 1 and is under pressure to increase revenues and the company's stock price, which is off more than 40 percent this year.
The merger gives IBM, the world's largest supplier of computers and computer services, the consulting arm of PriceWaterhouseCoopers, the world's largest accounting firm. The combined IBM-PriceWaterhouseCoopers will rank a close second to top consultant Accenture Ltd. ACN.N , formerly Andersen Consulting.
Tom Rodenhauser, president of Consulting Information Services in Keene, New Hampshire, said IBM got a bargain-basement price.
"Amazing how things change, isn't it? It's a steal for IBM.... It was overinflated in October 2000. PwC was trying to get this great price at the time, but didn't."
IBM shares edged lower after the announcement, slipping to $71.26 in after-hours trading on Instinet from $71.79 at the close on the New York Stock Exchange.
Growth in IBM's services division drove IBM's earnings during the 1990s but has slowed in recent quarters as large corporations cut back not only on purchases of new computers, but the services that come with them.
IBM To Add 30,000 Employees
IBM's service business, which by itself employs about 150,000 employees and has grown to become larger than its flagship computer hardware division, will take on 30,000 new employees with the acquisition. IBM's head count at the end of 2001 was about 320,000 people but it has since trimmed its ranks by at least 8,000.
IBM Chief Financial Officer John Joyce said that the company would take a charge of less than 30 cents in the fourth quarter of 2002 to cover restructuring. He said that he sees the unit adding to earnings by the fourth quarter of 2004.
IBM said it will pay $2.7 billion in cash and $400 million in stock for the unit. The deal also includes $400 million in convertible notes.
Joyce said that the move was atypical for IBM, which traditionally looks to grow through its own research and development efforts. IBM's next-largest acquisition was the 1995 purchase of software developer Lotus for $3.2 billion.
John Jones, an analyst with brokerage firm SoundView Technology Corp. said IBM was taking advantage of the low valuation of computer services companies.
"IBM is being very opportunistic given the attractive valuations in the services segment right now," he said. "It's buying up a quality company for a very attractive price."
Under Pressure To Split Up
The move comes as accounting firms are increasingly under pressure to split their auditing and consulting businesses amid accounting scandals that have brought increased attention to potential conflicts of interest.
But becoming an independent company would have been a radical change for the company, said one analyst.
"I think that they all along hoped that somebody would present an offer that would be reasonable. They've been shopping around for a while," Gartner vice president Linda Cohen said.
HP spokeswoman Rebeca Robboy said that HP recently considered buying the PwC unit. "Over the last several weeks and months HP had the opportunity to buy PwC and chose not to.... We walked away."
PriceWaterhouseCoopers Chief Executive Samuel DiPiazza told Reuters that he was happy with the lower price.
Noting the discussions with HP back in 2002, he said, "I think now we all learned a little bit about those values versus real values. We think it is a fairly priced deal and one we're proud to be part of."
The deal is subject to regulatory approval and approval from the local PriceWaterhouseCoopers firms, the company said.
Because its auditor is PwC, IBM indicated it has moved carefully to allay concerns about auditor independence and has already sought clarification from the Securities and Exchange Commission on the issue. <<
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