HP Charts Service Path, Bids for PwC

Underscoring the importance of services in the high-tech world, Hewlett-Packard (NYSE: HWP) says it is in talks with PricewaterhouseCoopers to acquire that firm’s professional consulting practice.

Although talks are not yet finalized, HP said in a statement that the purchase price would likely be in the $17 to $18 billion (US$) range and involve a combination of stock and cash. HP said “significant issues remain to be resolved” before a deal can be sealed.

HP confirmed the talks were ongoing following a report in the New York Times that also cited IBM, General Electric and Microsoft Corp. as potential suitors for the consulting firm.

Move to Services

HP is following the lead of other high-tech giants, especially chief rival IBM, which earlier this year said it expected its consulting business to grow faster in coming years than its computer hardware and software divisions. In 1999, Big Blue brought in nearly $10 billion in consulting revenue, about one-eighth of the company’s overall sales.

Last year, Cisco Systems Inc. made a similar move by spending $1 billion for a 20 percent stake in KPMG’s consulting efforts. A spin-off and initial public offering is planned.

The Palo Alto, California-based Hewlett-Packard already employs about 6,000 consultants and would acquire about 30,000 more by buying PwC. The company ranks as the sixth largest consulting firm, according to Dataquest. IBM ranks first, and EDS Corp. is second.

Focus on Innovation

HP said the acquisition would “complement HP’s offerings by further strengthening the linkage between business process transformation and technology implementation.”

Under chief executive officer Carly Fiorina, HP has refocused on innovation, plunging headlong into Internet applications for its products and promising to bring back the company’s original “garage” mentality that prioritized the generation of new ideas. The company now believes it must be able to work closely with customers to find out what technology they need.

Investors, however, appeared uncertain about how the acquisition would affect HP’s customer service strategy and its recent success in developing Internet applications for its printers and computers. HP’s stock dropped more than 5 percent to $114 after word of the deal hit Wall Street on Monday.

Avoiding Conflicts

As the deal moves forward, HP says it will drop PwC as its accounting firm to avoid any appearance of impropriety.

In fact, avoiding conflicts is one reason why PwC may be seeking to sell its consulting division at this time. The U.S. Securities and Exchange Commission has been pressuring the largest professional services firms to separate their accounting and consulting businesses to avoid adverse interests. Earlier this year, a judge ordered Arthur Andersen to split the two sides of its business.

Analysts consider the move a bold one for HP, whose biggest acquisition to date was the $1.2 billion takeover of VeriFone in 1997. However, industry experts also note that services generally carry a higher profit margin per dollar of revenue than computer hardware and software.

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