InformationWeek

November 16, 1998

Merger Mania Vs. Merger Meltdown

Analyzing The Integrators

Methodology

Fortune One's Outsourcing Challenge

For Some, Small Vendors Are Better

Palmisano Extends IBM Relationships

CSC Chief Emphasizes Flexibility

Sprinkle Delivers For Deloitte

For Aris, Boutique Is Bountiful

Vendors Plan For Post-2000 Work

Behind The Numbers: Sizing Up The Integrators

Research Charts

Billions of dollars changed hands during the past year among IT services vendors bent on getting bigger. But the merger deals that weren't made grabbed just as many headlines.

Citing regulatory difficulties, Ernst & Young and KPMG Peat Marwick in February abandoned their attempt to form the world's largest accounting and consulting firm. KPMG is now evaluating a public offering for its consulting unit, which company executives say would allow that business to make acquisitions and vendor alliances. A spokesman says a decision is expected before year's end.

Price Waterhouse and Coopers & Lybrand succeeded where Ernst & Young and KPMG failed, merging in July to create the world's largest professional services company: PricewaterhouseCoopers. It's too soon to tell what kind of long-term impact the deal will have on the companies' IT service offerings, says Howard Niden, head of the firm's IT and systems integration practice for the Americas. As for customers, "most don't even realize there's been a change," he says.

In February, Computer Associates made a $9 billion hostile bid for Computer Sciences Corp. CSC successfully fought off the takeover attempt, but CA vowed to become a major player in IT services through smaller acquisitions and internal development.

Compaq and Digital Equipment merged in June, and what had been Digital Services became Compaq Services. John Rando, head of Compaq Services, set a high goal: $15 billion in revenue by 2002.

Andersen Consulting is still embroiled in a dispute with Arthur Andersen & Co., its fellow Andersen Worldwide subsidiary but a competing vendor of IT and business consulting services. The rivalry turned ugly in late 1997, when Andersen Consulting charged breach of contract and irreconcilable differences, saying it wanted independence from Andersen Worldwide. It filed an arbitration case, hoping to recover some of the hundreds of millions of dollars it has paid Arthur Andersen as part of a cost-sharing arrangement. Arthur Andersen, in turn, is seeking 150% of Andersen Consulting's roughly $6 billion revenue, all rights to the Andersen name, and all technologies and methodologies developed by Andersen Consulting. Andersen Consulting executives expect the dispute to be resolved next year.

A company on the opposite end of the consolidation trend is EDS, which has its own internal problems. EDS, spun off from General Motors in 1996, is under intense Wall Street scrutiny for its poor stock performance, and it has bowed to pressure to find outsiders to fill separate chairman and CEO positions, both now held by Les Alberthal. In addition, a search is still on for a CFO to replace Jody Grant, who resigned in January to pursue a career in banking.

Most analysts expect more upheaval in the IT services industry. IBM, the largest IT services vendor, has just 8.3% of the total worldwide market, so there are still lots of small firms to gobble up. "When things level out in the stock market, I think merger activity will continue," says J.P. Morgan & Co. analyst Terrence Tierney. "It's a consolidating industry. It's diverse and highly fragmented, but it's consolidating."

--Bob Violino and Bruce Caldwell