Hewlett-Packard Co., the largest U.S. computer company after IBM, is preparing to follow its bigger rival to the softer side of technology by spending up to $18 billion to buy the management consulting arm of PricewaterhouseCoopers.
Hewlett-Packard confirmed reports Monday that it is in advanced talks to acquire the management and information-technology consulting business from the Big Five accounting partnership.
A combination "would complement HP's offerings by further strengthening the linkage between business process transformation and technology implementation," HP said in a statement.
The anticipated cash and stock purchase would dwarf all previous HP takeovers and mark the most dramatic move by CEO Carly Fiorina, who was hired last year as the company's first outside leader. Fiorina hopes to drastically increase HP's profit growth by offering more services to potential buyers of the company's computer systems.
But Wall Street was concerned about the hefty price tag of more than three times the consulting unit's reported 1999 revenue of $4.96 billion. On Monday Hewlett-Packard shares tumbled $7 to $114 on the New York Stock Exchange, their sharpest single-day drop since Aug. 17.
PricewaterhouseCoopers' consulting arm has about 30,000 employees, compared to HP's 86,000, and might have about $1.5 billion in profit, said Tom Rodenhauser, who edits a consulting industry trade publication.
"The idea of them making an accelerated push into services . . . is not all that controversial," said J.P. Morgan securities analyst Daniel Kunstler.
Consulting firms more typically sell for closer to the amount of yearly revenue they generate, industry experts said.
Some HP shareholders were more supportive, noting that profitability and sales growth for information management consulting are high.
"Pricewaterhouse comes in with a good reputation," said David Soetebier, a technology analyst at Banc of America Capital Management, a big HP investor. "They should be able to grow at the industry rate of 20%."
HP said the deal, if it goes through, would dilute profit this year and be neutral next year, before amortization costs.
The major accounting firms have been under public pressure to split themselves up because of Securities and Exchange Commission concerns about conflicts of interest when a firm does accounting on a customer's financial reports and also consults for that company. PricewaterhouseCoopers announced plans in February to separate a number of its consulting operations.
IBM's Global Services division, which manages computer systems for large corporations and provides consulting services, generated $32 billion in revenue last year.
At HP, Fiorina has also targeted consulting services as a potentially more profitable line than the company's computer and printer hardware business. HP added 600 consultants in the fiscal third quarter alone, giving it a total of 6,000.
"When a public entity acquires a partnership, all the people coming in are coming into a real foreign territory," said Art Bowman, editor of Bowman's Accounting Report.
Even when two consulting firms merge, as Price Waterhouse itself did just two years ago with Coopers & Lybrand, there are problems with corporate cultures.
A computer company swallowing a large consulting firm will be a major strain, observers predicted.
"In theory, this kind of deal makes a lot of sense. HP looks at the margin and it drools," said Rodenhauser. "But there has been very, very little . . . evidence that suggests that this will be a success."
HP has made only a few, relatively small acquisitions in its 61-year history. The largest was Verifone, which it bought in 1997 for $1.3 billion in stock.