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IBM Swallows PwC Consulting

Seeking to claim definitive ownership of the business consulting and technology services space, Big Blue Tuesday unveiled plans to acquire PricewaterhouseCooper's PwC Consulting unit for $3.5 billion in cash and stock.

"To remain competitive in their own markets, and to invest in information and technology wisely, our customers are looking for more than just hardware and software products," IBM Senior Vice President and Chief Financial Officer John Joyce told analysts. "They want to know how an integrated technology plan can leverage their business plan, driving efficiencies through the transformation of their own business processes."

"And this is the focus of IBM's strategy, to deliver business value to clients through the integration of technology and business process insight," he continued. "Today's announcement of the acquisition of PwC Consulting underscores IBM's commitment to this strategy -- accelerates it -- and uniquely positions IBM with capabilities to deliver superior business value and winning infrastructure solutions to our customers."

The IBM Global Services Group is already the industry's largest business and information technology services provider, with 150,000 employees with annual revenue of $35 billion in 2001. PwC Consulting, which PricewaterhouseCooper had been planning to spin off through an IPO, has about 30,000 employees, with estimated fiscal 2002 revenue of about $4.9 billion.

"The client is the driving force behind today's announcement with PwC," said IBM President and Chief Executive Officer Sam Palmisano. "Clients are not only looking for innovative ideas to improve their businesses, they are seeking a partner with deep business expertise and the ability to exploit leading open standards-based technology to turn these ideas into bottom-line business benefits. This acquisition underscores our commitment to this strategy."

Under the deal, IBM has offered$2.7 billion in cash, $400 million in a convertible note, and $400 million stock for PwC Consulting. IBM plans to combine PwC Consulting with the Business Innovation Services unit of IBM Global Services, creating a new global business unit. Ginni Rometty, general manager of IBM Global Services - Americas, will take the helm as general manager of the new unit, reporting to Doug Elix, senior vice president and group executive of IBM Global Services.

"Our consulting and services professionals will provide a powerful capability beginning with business innovation and extending through implementation to help clients improve their competitiveness and drive sustained growth and profitability," Palmisano said. "Together with the world-class innovations of IBM Research and our business partner offerings, this new business unit will deliver comprehensive, end-to-end business and technology solutions."

The deal also releases PwC Consulting from some of the constraints it is under as part of an accounting firm. Joyce said Big Blue's analysis indicated the firm would immediately recognize improved revenues from customers that are currently also audit customers of PwC.

However, he also noted that the acquisition will likely reduce IBM's earnings per share for the fourth quarter of 2002 by about 30 cents. He said Big Blue estimates the acquisition will be accretive by Q4 2003, and contributing double-digit revenue growth by year-end 2004.

The two companies have signed a definitive agreement, approved by both boards. The transaction is still subject to regulatory approvals and the approval of local PwC firms through the votes of their partners. Big Blue said it expects to close the deal around the end of the third quarter.

Additionally, IBM said it has been working with the U.S. Securities and Exchange Commission (SEC) and PwC to establish procedures under a no-action letter to comply with SEC auditor independence rules.