IBM's PwC purchase a smart strategic move, analysts say

IBM's PwC purchase a smart strategic move, analysts say

IBM's $US3.5 billion buyout of PwC Consulting is a smart move for both companies and is likely to push IBM's already market-leading IT services organisation further ahead of competitors, industry analysts said on Wednesday.

"IBM is now not only the largest provider of systems integration and professional services, it's the largest in consulting as well," said Sam Albert, president of consulting firm Sam Albert Associates, in Scarsdale, New York, and a former IBM executive. "What this does is give IBM a range of consulting skills that they were making before, and now they're buying."

Echoing comments from IBM executives, analysts cited PwC Consulting's strength in tailored solutions for industries such as pharmaceutical, financial services, automotive and retail as an asset that will add depth to IBM's offerings. Also valuable to IBM will be PwC Consulting's expertise in implementing ERP (enterprise resource planning), CRM (customer relationship management) and SCM (supply chain management) software, they said.

However, with a staff of 150,000 worldwide, IBM Global Services already had significant systems integration capabilities, complementing its core outsourcing and maintenance strengths. PwC Consulting will also add only incrementally to IBM Global Services' backlog of orders under contract but not yet delivered and paid for. IBM ended its most recent quarter with a backlog of $US106 billion, to which PwC Consulting will add $1 billion.

What PwC Consulting brings to IBM that Big Blue couldn't easily have built internally is expertise in blending IT services with business strategy consulting, analysts said.

IBM had been hiring from consulting firms to build strength in that area but now has moved far ahead on that goal in one sweeping move, Albert said.

"IBM realises customers do not want piece parts, they want a total solution. That also means strategy," he said.

"PwC has a different set of customers than IBM -- not all different, but some -- and a different engagement model with those customers," said Andy Efstathiou, an analyst with The Yankee Group in Boston. "PwC is much more engaged at the consulting and solutions level. IBM is engaged at the infrastructure level."

A significant integration challenge for IBM will be retaining top PwC Consulting employees, Efstathiou said. The fact that the companies have two different organisational models, with PwC being a partnership and IBM organised in a corporate fashion, will complicate the integration.

"Some of the partners, frankly, are going to end up leaving. It is possible to integrate a partnership-style firm into a corporate-style firm. It takes a lot of changeover to make it happen," he said.

One make-or-break aspect of the deal will be IBM's ability and willingness to reshape the new business unit it plans to create, combing PwC Consulting with its Business Innovation Services group into a traditional business consulting organisation, Efstathiou said.

"If everything was to change to the existing IBM model, I certainly don't think the customers would be willing to stay. If IBM itself changes so that there is a part of IBM that is offering services under a PwC model, perhaps they would be," he said.

Several observers said the acquisition will increase pressure on IBM's rivals, notably Hewlett-Packard, which said on Wednesday that it sees little value in the deal and recently passed up the chance to claim PwC Consulting for itself.

"In terms of collateral impact, the PwC acquisition by IBM could be perceived as a negative for HP, which is trying to grow its services business and will now face a bigger competitor in IBM," Bear Stearns & Co enterprise hardware analyst Andrew Neff said in a research note. "The competitive impact on EMC and Sun is also negative . . . as IBM is buying up one of their partners and could thus potentially yield influence on its services customers' hardware purchases."

Efstathiou also said the deal will affect HP, increasing the need and shortening the time frame for it to successfully integrate recently acquired Compaq.

"It would not surprise me to see other companies make these kinds of alliances," Albert said, noting that HP has been strengthening ties to other major consulting firms while Microsoft is "cozying up" to PwC Consulting rival Accenture.

Although shares of IBM dipped to close down 2 per cent, at $70.40, in trading on Wednesday on the New York Stock Exchange, financial analysts generally applauded the deal.

The transaction "looks solid both strategically and tactically", and was done at a reasonable price, said a Merrill Lynch report. SoundView Technology Group said it thinks strategic benefits will reap long-term rewards for IBM. MorningStar noted that IBM "has long been moving toward looking more like a computer services company than a hardware vendor".

Prudential Securities was among the few dissenters, reiterating its "hold" rating on IBM's stock and expressing surprise that the deal was done "above a range IBM had been comfortable with".

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