| Annex Research | Annex Bulletins | Quotes | Workshop | Feedback | Columns| Activism | The New York Times September 12, 2000 Hewlett-Packard Is in Talks to Buy Consulting Unit FOR FAIR USE ONLY By
Barnaby J. Fedder Hewlett
Packard and PricewaterhouseCoopers confirmed yesterday that they were
discussing the sale of the PricewaterhouseCoopers management and
information technology consulting practice to Hewlett-Packard. Hewlett-Packard
said it expected to pay $17 billion to $18 billion in cash and stock if
the deal was completed. Analysts
said such a deal would move Hewlett-Packard rapidly along the path of
decreased dependence on hardware sales, following the lead of rivals like
I.B.M. But some said that an alliance rather than an outright takeover
might achieve many of the benefits for Hewlett-Packard with fewer risks
and that the sheer magnitude of the purchase worried investors. Hewlett-Packard
shares closed down $6.63 at $114.75 on the New York Stock Exchange. "It's
not an argument about a bigger push into services," said Daniel
Kunstler, an analyst with J. P. Morgan. "It's a question of how much
magnitude, how quickly." For
PricewaterhouseCoopers, formed by the 1998 merger of Price Waterhouse and
Coopers & Lybrand, the deal would respond to concerns voiced by the
Securities and Exchange Commission and others about potential conflicts of
interest between its consulting arm and its traditional accounting and
auditing practices. And although PricewaterhouseCoopers declined to
discuss the potential financial rewards of the deal to its partners,
people in the industry said they would be extremely lucrative and hard to
resist. "Most
partners will say it's a wonderful idea if they are getting this
valuation," said Jon McKenna, editor of Public Accounting Report, an
industry journal. The
management consulting practice includes 31,000 employees and about 1,500
partners out of PricewaterhouseCoopers' worldwide total of 150,000
employees and 10,000 partners, according to David Nestor, a company
spokesman. Mr. Nestor said PricewaterhouseCoopers would not discuss how
any agreement with Hewlett-Packard would be voted on at the giant
partnership or how the takeover spoils would be divided. Hewlett-Packard
cautioned yesterday that some terms of the transaction had not been agreed
upon and that significant issues remained to be resolved, leaving open the
possibility that the deal might yet unravel. The company, based in Palo
Alto, Calif., said it expected the acquisition to add to the 15 percent
revenue growth rate it has forecast, and to dilute its cash earnings per
share mildly in fiscal year 2001. It said there would be no significant
effect on earnings per share in fiscal year 2002. The
steep price reflects the growing pressure on Hewlett-Packard as computer
hardware becomes more and more like a commodity product with low profit
margins. Hewlett- Packard has been hiring 200 consultants a month,
according to some outside estimates, in the effort to build its consulting
business. It
hired Steven Hahn away from I.B.M. to run the business. But it would take
a deal like adding PricewaterhouseCoopers' 30,000 consultants to its
homegrown force of 6,000 to quickly push the company into the front ranks
of the trend. "The nature of the business has changed because the customer is really paying for the solution, not the PC, minicomputer or mainframe," said Bob Djurdjevic, president of Annex Research. "So the top of the food chain is the services and consulting business. And companies that were box providers, like H.P., have belatedly realized they were being left behind." If
the deal is completed, Hewlett- Packard's consulting arm would be roughly
comparable to the Global Services Group of the Compaq Computer
Corporation, which has 38,000 consultants around the world. Compaq built
its consulting arm in large part through the acquisitions of the Digital
Equipment Corporation and Tandem Computer. "We expect
that what these guys are going to find, as Compaq did, is that everything
doesn't just fall into place," said Jeffrey Lynn, vice president and
general manager of Compaq Global Services. "But I think it's a clear
confirmation of what we, I.B.M. and others have concluded, that the way
you've got to market with your enterprise solutions is a blend of
technology and services." |
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