International Business Machines Corp, the world's biggest seller of computers and related services, agreed to buy Pricewater-houseCoopers LLP's business-consulting unit for US$3.5 billion in cash and stock.
The purchase will reduce fourth-quarter earnings by about US$0.30 a share and add to profit by the end of next year, IBM executives said on a conference call.
The company, which gets 44 percent of revenue from computer services, is forecast to earn US$1.40 a share in this year's fourth quarter.
IBM and rivals such as Hewlett-Packard Co are trying to increase sales of services to compensate for slowing demand for computers and software.
PwC will scrap plans for an initial public offering of the unit, and the sale lets the world's largest accounting firm eliminate perceived conflicts of interest that came from selling clients both audit and consulting services.
"They're getting a fire-sale price," said Michael Kagan, who manages the US$1.2 billion Smith Barney Growth & Income Fund, which sold its shares of IBM earlier this year. "My guess is that PricewaterhouseCoopers was desperate to sell."
In the wake of Enron Corp's collapse and questions about its auditors' independence, Congress passed and President George Bush signed legislation that would limit some consulting work by audit firms, including technology consulting.
Hewlett-Packard, the second-biggest computer maker behind IBM, considered buying the PricewaterhouseCoopers unit in late 2000 for as much as US$18 billion. The company abandoned the plan after shareholders criticized the purchase, sending the stock 40 percent lower in two months. Hewlett-Packard in May bought Compaq Computer Corp to build a bigger rival to IBM in consulting and services.
IBM's Global Services unit, the company's largest by revenue, already is the biggest technology-services provider, with 150,000 workers and 2001 sales of US$35 billion.
Services accounted for US$8.66 billion of IBM's US$19.7 billion in second-quarter sales. The division sets up and manages computer networks for corporations and offers consulting services on technology projects.
PwC Consulting, which has 30,000 employees, had revenue of US$6.7 billion in the year ended June 30, 2001.
Buying the consulting unit gives IBM relationships with executives at corporations that work with PwC Consulting and adds expertise in how businesses design and manage day-to-day processes, IBM Senior Vice President Doug Elix said.
Buying PwC Consulting will help IBM add customers faster than going after new contracts itself, some investors said.
"Sometimes buying into a portfolio of clients is easier than finding them yourself," said Bruce Raabe, chief investment officer of Collins & Co, which oversees US$500 million and holds IBM shares. "The services business for IBM has been pretty stable and it offsets any volatility in their products business." PricewaterhouseCoopers is the last of the Big Five US accounting firms to sell or split off its consulting business, allowing those units to pursue lucrative contracts without facing perceived conflicts because of the accounting firm's audit work.
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