Hewlett-Packard may buy Pricewaterhouse unit

Consulting business bears a price tag of up to $18 billion

Acquisitions

September 12, 2000|By BLOOMBERG NEWS

PALO ALTO, Calif. - Hewlett-Packard Co., the world's No. 2 computer maker, said yesterday that it may acquire Pricewater- houseCoopers LLP's management and information-technology consulting business for as much as $18 billion in cash and stock.

This would be HP's first major acquisition since Chief Executive Officer Carly Fiorina joined the company last year. Fiorina is seeking to drive growth by offering more services to potential buyers of the company's computer systems. PricewaterhouseCoopers wants to split its consulting business from auditing partly to address regulators' concerns about conflicts of interest.

"HP's services- and consulting-revenue basis still has been relatively small" compared with International Business Machines Corp.'s and Compaq Computer Corp.'s, said Richard Chu, an analyst at SG Cowen Securities Corp.

In its fiscal year that ended in October 1999, HP got $5.9 billion, or 14 percent, of its revenue from information-technology services, which include consulting and customer support. By comparison, IBM's Global Services division, which manages computer systems for large corporations and provides consulting services, generated $32 billion in revenue last year, or more than a third of the company's total sales.

"We are in discussions, but we aren't in a position to elaborate," said HP spokesman David Berman.

The shares of Palo Alto, Calif.-based HP fell $7 to $114 a share on the New York Stock Exchange yesterday.

HP and other companies that sell computer networks and services have been seeking to offer more consulting services and strategic advice to clients. As corporations expand their use of the Web to handle business processes, demand has mushroomed for consultants who can handle Internet sites, software integration, Web servers, data storage and other needs.

"Gaining PwC would help [HP] understand what the client wants," said Hugo Mills, an analyst at Donaldson, Lufkin & Jenrette in London. "It would also give them an army of people to help them integrate their product."

HP also wants to boost revenue in its server division, which sells the expensive, powerful computers that run Web sites and corporate networks. The company's shares fell 11 percent Aug. 17 after fiscal third-quarter sales growth in the server unit fell short of analysts' forecasts.

"The growth rates in support services are phenomenal," said Daniel Morgan, an analyst at Noble Financial Group with an "attractive" rating on HP. Morgan said information-technology services revenue rose 17 percent to $1.8 billion in the fiscal third quarter and consulting revenue rose by 46 percent.

New York-based PricewaterhouseCoopers' consulting unit had $7.1 billion in revenue in fiscal 1999, according to Consultants News, a trade newsletter. The management-consulting business generated $4.96 billion in sales.

Cap Gemini SA, Europe's largest computer-services company, paid $6.8 billion this year for the consulting business of Ernst & Young, the world's fourth-largest accounting firm.

PricewaterhouseCoopers, a closely held company with 2,000 partners and 30,000 consultants, said in February that it planned to separate its auditing and consulting divisions, as the U.S. Securities and Exchange Commission increases pressure on accounting firms to split those businesses to avoid conflicts of interest.

A transaction with HP could also help keep consultants, whose partnership shares could be converted into HP stock, said Bonnie Digrius, an independent consulting market analyst.

If completed, the transaction would "mildly" dilute cash earnings per share in fiscal 2001 and be neutral in 2002, HP said. Any accord would have to be approved by partners at PricewaterhouseCoopers.

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