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HP mulls $18 billion bid for PricewaterhouseCoopers arm

The computing giant says it is in talks to buy the consulting business of the Big Five accounting firm to strengthen its services arm, sending HP's shares down 3 percent.

3 min read
Computing giant Hewlett-Packard today said it is in talks to acquire the consulting business of PricewaterhouseCoopers to strengthen its services arm.

Gartner analyst Lisa Stone says Hewlett-Packard's acquisition of the consulting-services operations of PricewaterhouseCoopers would be a logical move for the computer-products manufacturer as well as for the consulting, tax and audit services giant.

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HP is considering the acquisition of PricewaterhouseCoopers' global management and information technology practice for between $17 billion and $18 billion in cash and stock, the company confirmed in a statement early this morning.

The acquisition of PricewaterhouseCoopers would add substantial backbone to HP's global services group and further its strategy to provide businesses with virtually anything they need, including servers, services, software and systems design, for e-commerce and Internet operations. In this market, the company faces stiff competition from IBM, which maintains one of the largest consulting groups in the world, and Sun Microsystems, primarily a hardware manufacturer, which has been hiring consultants at a frantic pace.

The news sent shares of HP lower in early trading. Shares of the computer maker fell $3.94, or 3 percent, to $117.06.

HP said the terms of the transaction have not been agreed upon and that significant issues remain to be resolved.

A PricewaterhouseCoopers spokesman confirmed that discussions with HP are taking place but would not specify terms or details of the possible deal.

The spokesman added that a deal with HP would be in line with the accounting giant's previously stated plans to split its divisions into two or more businesses. Earlier this year, IBM was rumored as a bidder for PricewaterhouseCoopers' consulting division.

The acquisition talks come at a turning point for many of the so-called Big Five accounting firms, which for years have faced a question of conflict of interest: Should a privately held auditing firm also provide business consulting for clients? This concern prompted all of the Big Five--PricewaterhouseCoopers, Andersen Consulting, Deloitte & Touche, Ernst & Young and KPMG--to either separate from their accounting side or consider merger options.

Last month, Andersen Consulting officially split from accounting giant Arthur Andersen. Ernst & Young recently sold its consulting unit to European professional services firm Cap Gemini. KPMG Consulting is moving closer to an initial public offering, for which it filed in May.

Many analysts have said that a marriage between HP and PricewaterhouseCoopers would make sense because of the pressure on accounting firms to unload their consulting divisions and because many hardware and software companies have been scrambling to expand into services.

Tom Rodenhauser, an industry analyst who heads Consulting Information Services, said that while HP already has its own in-house consultants, whom he likens to TV repairmen, the computer maker needs strategy consultants--people who go beyond sales, service and technology installation.

"HP wants to emulate what IBM had done (with IBM Global Services)," Rodenhauser said in a recent interview. "IBM has built a strong consulting services operation business over the last 10 years, basically organically, with very small acquisitions. HP, given (today's competitive) market, can't do a 10-year buildup on the services side, so what it has to do now is buy."

Though some analysts have said HP would be buying a solid consulting firm, the consulting market--particularly the Internet consulting sector--has been hit hard by investors concerned over its long-term prospects.

Net consultants including iXL Enterprises, Viant and Organic have recently seen their shares tumble after issuing profit warnings and reporting revenue shortfalls this quarter.

A wave of consolidation is thinning the industry's ranks. Only a year after many Internet consulting companies became Wall Street darlings with unprecedented stock valuations, shares have taken a drubbing as investors try to figure out which ones have the staying power to survive the shakeout.

In the event of its acquiring PricewaterhouseCoopers, HP said, the transaction would be added to its projections for 15 percent revenue growth but would mildly weaken its earnings per share in fiscal 2001 and would have little effect on earnings per share in fiscal 2002.

HP's IT services unit--which encompasses outsourcing, hardware and software maintenance, financing and consulting--reported $1.8 billion in revenue for the quarter that ended in July, a 17 percent increase from revenues of $1.6 billion for the same quarter the year before. Earnings came to $178 million.

Although revenue figures aren't broken out separately for consulting, consulting revenue within the IT services unit grew 46 percent, HP said. The company also hired 600 consultants during the quarter.