To date, the lion's share of
talk about its emphasis on "solutions" has been difficult to distinguish from the reams of blather produced around that vapid buzzword by the press offices of hundreds of technology firms.
And not without reason. H-P's consulting sales have lagged far behind sector leader
, and the company has generally kept public discussion of its relatively new
division vague and conceptual, circulating revenue figures among internal staff only.
But Monday changed all that. The head-turning
news that H-P is willing to commit as much as $18 billion to buy the consulting unit of
suggests that the company may have a much better idea of how large the potential market for "solutions" really is.
"Maybe they do," says
analyst Richard Chu, who rates the stock a buy, his firm's second-highest rating. "Or maybe they don't. Solutions and services are part of this vocabulary we take for granted.
Monday's news is either very scary or confirmation of something very important. My impression is that Carly
H-P President and CEO Carly Fiorina is a very bright lady who, in a short period of time, has gotten a good sense of what H-P had, what it doesn't have, and how the pieces play together." (SG Cowen hasn't performed any underwriting for H-P, though it did help take H-P spinoff
public late last year.)
The pieces, in this case, would fit together very nicely with H-P's vision of end-to-end offerings for customers. H-P would use Pricewaterhouse's consultants as a complement to its existing hardware business. The result: a full-scale service package including the conception of strategies, sales of things like PCs, storage devices and servers, the installation of that hardware, and continued service-maintenance relationships.
H-P has been steadily adding employees to its services business, now about 6,000 strong. PwC, with some 30,000 consultants, offers the chance to dramatically accelerate that growth strategy. There aren't many other ways for H-P to get that sort of scale, and it's that scarcity that is largely responsible for the hefty price tag H-P is ready to pay.
"It wouldn't be surprising if, in the end, they ended up overpaying somewhat," says Chu. "If overpaying means that you drive some
earnings dilution, that's pretty bad if they can't come up with a story in terms of growth and strategy. If they can do that, whatever hit they take, people forget that pretty quickly. You just reset the filters to the new numbers."
The new numbers would look good on the revenue front. Based on 1999 sales, PwC's consulting business would pretty much double H-P's services revenue, likely taking it above $15 billion, a respectable second to IBM, whose services operation pulled in about double that in 1999. In its statement confirming the talks Monday, H-P also said the deal would push it above its current 15% revenue-growth guidance.
But H-P also said the acquisition, if it goes through, would be "mildly dilutive" to cash earnings, or earnings excluding special items, in the fiscal year ending in October 2001, and have little effect on fiscal 2002 cash earnings.
"You'd have to say that Carly is doing what she said she'd do, which is making H-P into a growth company," says
analyst Andy Neff, who rates H-P a buy, his firm's highest rating. (Bear Stearns has not performed recent underwriting for H-P.) "Part of that is fixing what needs to be fixed -- H-P's introducing their
Tuesday. The other part is figuring how to grow the business where there's growth opportunity. The services business is one side where there's growth opportunity."