September 11, 2000 3:15 PM PDT

HP, PwC deal looks healthy, but complications loom

On paper, the idea of Hewlett-Packard buying the consulting division of PricewaterhouseCoopers seems smart. But in actuality, such a complex deal poses a string of challenges.

By buying PwC's consulting arm, HP would gain a highly trained force of nearly 31,500 technology and business consultants who would vastly expand its reach in the lucrative market for IT services. Such a move would make HP more tightly competitive with IBM as well as give it an advantage currently unmatched by rival Sun Microsystems.

Unfortunately for HP, integrating PwC--assuming the deal goes through--won't be easy. Consulting organizations are hired for their objective recommendations, so HP will have to ensure that the group isn't perceived as a sales front for HP hardware. Cultural conflicts between the two companies will also exist.

"PwC has been relatively technology neutral," Meta Group analyst Herb Vanhook said. Will HP "use PwC as a standalone entity and still maintain technology agnosticism? Or do they use it as a strategic drive to build on HP and its products? Either way, that's a hard juggling act."

The computer maker confirmed today that it is in talks with PricewaterhouseCoopers to acquire the Big Five auditing company's consulting division. The potential stock and cash deal would be worth as much as $18 billion.

The deal would help PricewaterhouseCoopers rid itself of one of the big conflicts of interest faced by all the Big Five accounting firms: auditing firms providing business consulting to their clients. The company has been under Securities and Exchange Commission scrutiny for years over this, and it is one of the last of the Big Five to peel off its consulting arm and emerge as solely an auditing firm.

For HP, acquiring PwC's consulting arm would open the door to a number of opportunities. Although HP's services unit accounts for nearly 12 percent of the company's revenue, it still primarily operates as a product-centric company, said Kurt King, an analyst at Banc of America Securities.

"For most of HP's customer list, HP is just a hardware vendor," he said.

Expanding its consulting group would also give HP a leg up in the three-way competition between IBM, Sun and HP. The companies are jostling to provide businesses with anything they need for e-commerce and Internet operations, including servers, services, software and system design.

IBM, for example, runs IBM Global Services, one of the largest consulting groups in the world. And Sun, primarily a hardware manufacturer, has also been on a tear to hire consultants and further its services strategy. HP's consulting group, even with PwC, will be smaller than IBM's but larger than Sun's.

On another field of competition, Sun leads the market in sales of Unix servers. During the last quarter, HP saw less growth than either Sun or IBM.

"Strategically, HP is focused on being a growth company. That is the critical issue here," said Andy Neff, an analyst at Bear Stearns.

The potential deal will inevitably be compared to Compaq Computer's acquisition of Digital. In 1998, the Houston-based company bought Digital primarily to obtain its consulting group. The results have been far from spectacular. In the last quarter, Compaq saw revenue in its consulting group decline by 4 percent to $1.7 billion.

The comparison isn't really appropriate, King said. When Compaq bought Digital, it bought an ailing hardware giant with business units that significantly overlapped with Compaq's at a time when Compaq was facing its own internal problems. Integrating and managing the acquisition proved to be a more unwieldy task than predicted.

By contrast, adding PricewaterhouseCoopers' division will be like adding a subsidiary. Integration issues would exist, but they would be far more manageable.

"HP is a relatively well-managed company, and the business they are acquiring presumably would be separate from 90 percent of HP," King said.

One risk, however, relates to the fact that PricewaterhouseCoopers and HP may operate too independently and not complement each other. Common wisdom says that services help sell hardware and vice versa. In practice, it often doesn't work that way. IBM's Global Services group, for instance, is massive, but many of its hardware units have languished.

Consulting groups are also generally obligated to remain objective.

"It is somewhat important for a consulting group to remain platform agnostic," he said. "Services are not necessarily a demand generator for the hardware business."

Other analysts raised this question as well. Allie Young, an analyst at Dataquest, said that HP's efforts in maintaining PricewaterhouseCoopers' integrity and product neutrality pose one of the most critical challenges for this type of deal.

"HP is really buying a lot of the skills that they don't have today like high-end business consulting and e-business consulting and a lot of the deep application skills," she said. Although HP has a lot of complementary skills that are very strong, she said, the real unanswered question is whether HP will maintain PricewaterhouseCoopers' credibility while not allowing the consulting firm to turn into an extension of HP's sales force.

 

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