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This IPO Could Use a Consultant


Talk about close calls. It was the fall of 2000, and Hewlett-Packard (HWP) was negotiating to buy PricewaterhouseCoopers's consulting unit. Just a few months earlier, Ernst & Young had gotten $11 billion for its consulting arm. Talk was that PwC's might be worth $18 billion to HP. But they could not come to terms, and HP went on to buy Compaq Computer (CPQ). Today, PwC's consulting biz is preparing to go public. From the look of its financial results, I'll tell you this: HP should be thankful it wound up with Compaq.

PWC Consulting's initial public offering, to be led by Morgan Stanley (MWD), is still some weeks away. So, such crucial details as a price range for the IPO shares and how much of the company will be sold to public investors remain to be worked out and disclosed. The dealmakers are even waiting on creation of a new name for the 32,000-employee management and information-technology consulting firm. It plans to declare its new corporate identity in a $110 million publicity campaign, much as Accenture did last year when it ditched its heritage as an Arthur Andersen offspring and sold its own stock.

Yet what you surely will not see in all the publicity is much talk of PwC Consulting's profitability. That's because there isn't much to speak of. Not, at least, by the accounting they will use after the IPO. Then, the company will be organized as a corporation instead of as a partnership, meaning that it will have to allocate costs differently. Instead of compensating its partners via large, pretax distributions, it will instead pay them salaries. As a corporation, it also will have to start paying income taxes.

To suggest what its financial position and performance might have been in the past if it had been a corporation, PwC Consulting's securities filing includes some pro forma statements. They are not promising. Its fiscal years end on June 30. In fiscal 2001, the company would have lost $15.7 million on total revenues of $7.1 billion. Its operating profit margin would have come to 1.2%. While fiscal 2001 was uninspiring, the most recently reported period, the six months ended Dec. 31, proved worse. On $3.3 billion in total revenues, the consulting unit eked out an operating profit of $3.4 million and had a $22.3 million net loss. PwC Consulting has not yet disclosed results for the March quarter.

All of this might be less disturbing if the company were not following two of its chief rivals into the realm of publicly traded corporations (table). The bigger of the two, Accenture, enjoyed an operating profit margin of nearly 12% in its most recent six months, ended Feb. 28. KPMG Consulting, the smallest of the three, posted a 5.7% operating margin in the six months ended Mar. 31. Both of these rivals also reported bottom-line profits.

Next to the performance of its rivals, PwC Consulting's pro forma numbers are so askew that I couldn't help but grow suspicious. Somehow, this comparison must not be fair. A company spokeswoman, however, declined a chance for Chief Executive Thomas O'Neill or other executives to elaborate on or dispute the appearance of weak profitability at PwC Consulting, preferring to stay quiet ahead of the sale of stock.

Naturally, prospective investors will be at least as curious about the company's outlook. But on that score, its securities filing is anything but optimistic, at least in the near term. Business these days--which is to say amid a sluggish economy and the scandal over some corporate auditors' conflicts of interest--is bad. In the March quarter, PwC Consulting said its backlog plunged in the U.S.--the direct result of clients choosing to keep PwC as their auditor but looking elsewhere when it came to consulting help.

That depressing fact is driving the company's IPO. Once separated from PwC, it stands to win back clients and grow anew. As the deal comes to market, I will be looking to see how the shares are priced. Accenture went public last July at about 1.3 times the past 12 months' revenues. It now trades a bit above that multiple. KPMG Consulting went public in February, 2001, and now trades at 1.1 times revenues. In this range, PwC Consulting would command a market value under $9 billion--half what it might have fetched from Hewlett-Packard not two years back. Talk about missed opportunities. By Robert Barker


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