InformationWeek: The Business Value of Technology

November 6, 2000

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Customers Question HP's Proposed Acquisition

Vendor re-evaluates plan to buy PricewaterhouseCoopers' management-consulting arm

By Larry Greenemeier

More on PricewaterhouseCoopers:

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arly Fiorina, Hewlett-Packard's president and CEO, set off a storm of speculation last week when she mentioned during a keynote speech at a Prudential Securities investment conference that HP was rethinking its September proposal to acquire PricewaterhouseCoopers' management-consulting division.

Fiorina said HP is "re-examining every aspect of the transaction, including price." HP refused to comment last week on rumors that the value of the deal had slipped from $18 billion to $15 billion. PricewaterhouseCoopers also had no comment, other than to say that negotiations are continuing.

Fiorina cautioned that the negotiations are taking place amid changing market conditions and that HP would proceed in a "very disciplined and deliberate" way to ensure it reaches a deal that's acceptable to its shareholders.

The question is, will the deal be acceptable to PricewaterhouseCoopers' customers?

Merrill Lynch & Co., a $22 billion New York financial-services firm, has worked with PricewaterhouseCoopers' management-consulting division for the past three years to build and populate data warehouses. Gene Fernandez, VP of the application infrastructure group in Merrill Lynch's investment banking division, says PricewaterhouseCoopers consultants have brought experience and competence to the project, and there's been no drop-off in the quality of PricewaterhouseCoopers' services over time--even after Price Waterhouse and Coopers & Lybrand merged in 1998.

But while PricewaterhouseCoopers has shown no obvious IT vendor bias in the past, Fernandez wonders how the firm's consultants would be able to avoid favoring HP products if they're assimilated into HP Services.

One thing is sure, Fernandez says: "Services has become so much of a commodity that customers aren't tied as strongly to a single provider. We can get similar services from a number of different companies."

HP and PricewaterhouseCoopers both have a strong interest in making the deal work. The addition of about 31,500 employees from PricewaterhouseCoopers' management-consulting practice would more than double the size of HP Services, better positioning it to compete with IBM Global Services. An agreement would also free PricewaterhouseCoopers from Securities and Exchange Commission pressure to divest its accounting and business consulting practices.

However, HP's desire to acquire a large consulting firm is stronger than PricewaterhouseCoopers' desire to sell its management-consulting practice, says Tom Rodenhauser, lead analyst for Consulting Information Services. "PricewaterhouseCoopers' consultants are looking for a level of autonomy in a deal with HP that HP might not want to offer," he says.

PricewaterhouseCoopers can give its consultants that autonomy by selling its consulting practice or spinning it off as a separate company, as KPMG did earlier this year. HP's failed bid to buy Ernst & Young Consulting and the unwillingness of Arthur Andersen and Deloitte Consulting to sell their consulting practices mean the window is closing for HP to make a consulting acquisition that will have a significant impact.

PricewaterhouseCoopers, of course, wants to get as much value for its practice as it can. But HP's re-examination of the proposed acquisition may be a stalling tactic while HP waits for its stock to go up. "That way, HP doesn't have to pay out as much cash for the acquisition," Rodenhauser says.

If the deal does go through, it could hurt both companies in the short run. The success of any acquisition or merger in the consulting business is measured by the retention of consulting talent. According to several current and former employees, PricewaterhouseCoopers is still adjusting to its merger with Coopers & Lybrand. One former principal consultant in PricewaterhouseCoopers financial advisory services estimates that within three months of that merger, 60% of the firm's management consultants left.

Peter Stroeve, president and CEO of Professional Data Exchange Inc., a privately held Portland, Ore., systems integrator, expects his company's relationships with HP and PricewaterhouseCoopers to grow more distant if the acquisition is completed. "HP consulting has been very focused on selling more HP product, whereas PricewaterhouseCoopers is into a wider variety of projects," he says. Stroeve sees trouble ahead if PricewaterhouseCoopers becomes just another channel for HP products, noting that, "Customers are not comfortable when a company that's supposed to be an objective service provider pushes a particular brand on a regular basis."

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