Merger & Acquisition - Ibm and Pricewaterhouse Consulting

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before – MERGER & ACQUISITION of IBM and Pricewaterhouse Consulting

1. WHY – UNDERLYING REASONS FOR THE PROJECT
Over the past five years, IBM has quietly transformed itself into a "software, solution and services" company. With the transformation from a hardware vendor to a solution provider, it has entered the area of consulting services. IBM bought PricewaterhouseCoopers Consulting (PwCC) in October 2002 and became the world’s largest technology services company, with annual revenue of $40 billion. By comparison, its next-largest competitor, Electronic Data Systems Corp., posted $21.5 billion in sales at the same year. The acquisition by IBM, which already has huge presence in the consulting market, affected other companies such as Sun Microsystems, Dell Computer, Hewlett-Packard and EDS. IBM is a strong technology player; PwCC is a strong player in strategic consulting, particularly in the enterprise area. The real strength of this acquisition is the ability of IBM to offer strategic consulting to corporate management where it has been weak. PwCC has strategic consulting expertise, but was generally considered weak in technology. With this merger both the companies can complement their strengths. With the closing of this sale, PwCC effectively completed the reorganization that began more than two years ago of 2002, and fulfills the commitment to unleash the consulting unit from the regulatory restraints of the industry. Combining PwCC with IBM fully achieves the goals set for the separation, it also provides clients and professionals with greater opportunities and access to innovative solutions.

2. HOW – M&A PROPOSED (STOCK, CASH, STRUCTURE)
In 2002, IBM completed 12 acquisitions at an aggregate cost of $3,958 million, and the largest acquisition was PwCC. IBM paid for the purchase of PwCC $3,474 million ($2,852 million in cash from reserves and current cash flow, $294 million primarily in the form of restricted shares of IBM common stock and $328 million in notes convertible to restricted shares of IBM common stock). The charge for the acquisition will lead to a decrease of 30 cents per share. IBM announced the acquisition in July 2002 and completed in October 2002. It was planned in to be done in three phases. The first phase included the closing of the deal, the establishment of the new unit's operating models and the naming of the unit's key top executive leaders. The second phase, involved filling in details around the operating model of the new unit regarding specific industries and technology areas, as well as appointing practice area team leaders and mapping the consultants to the different teams. The final phase, focused on putting in place new IT systems and tweaking existing systems to fit the unit's business model. It provided IBM with new expertise in business strategy, industry-based consulting, process integration and application management. The purchase price above includes an estimated amount of net tangible assets to be transferred of approximately $422 million. The recorded amount of net tangible assets transferred to IBM from PwCC on October 1, 2002, was approximately $454 million higher than the estimate. The amount of recorded net tangible assets transferred was a review process between both parties under the terms of the agreement. Therefore, although the net tangible assets recorded by IBM included this incremental amount, such amounts were adjusted, dollar for dollar, in 2003 under the terms of the agreement. Any cash settlement to either party resulting from this process occurred in 2003 and affected the values assigned to assets acquired and liabilities assumed. In connection with the acquisition, IBM incurred approximately $196 million of pre-tax, one-time compensation costs for certain PwCC partners and employees. This amount relates to restricted stock awards and the compensation element of the convertible notes issued as part of the purchase consideration and was recorded in...
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