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by Andrew Lam-Po-Tang
IBM announced yesterday (July 30, 2002) that it had agreed to buy the PricewaterhouseCoopers (PwC) consulting business for US$3.5 Bn in cash and stock.
PwC Consulting has 30,000 employees and had revenue of US$6.7 Bn for the year ended June 30, 2001. PwC Consulting is in the process of rebranding itself 'Monday.'
What is interesting about this transaction is that it may affect the way consulting firms are valued in general, including specialised consulting firms such as graphic design/creative services businesses.
This has implications for anyone who owns a graphic design business and is thinking of any one of the following strategic options:
- going public
- selling your business (or part of) to a private buyer
- selling shares in your business to key employees as part of a succession plan
In the recent past, creative services firms were valued at roughly 2-3 times revenues. For example, in September 2000, Hewlett Packard had considered buying the PwC Consulting group for about US$18 Bn.
The IBM-PwC deal changes that approach to business valuation considerably, since the price is in effect 0.5x revenues, rather than 2-3x!
Of course, at the moment there are some major external factors working here that apply specifically to accounting firms, such as the recent scandals in the US (Enron, Worldcom, etc.) and the resulting legislative backlash that is forcing the big accounting firms to create greater separation between their audit and consulting business lines. So one could argue that IBM has picked up a huge bargain because PwC is effectively being forced to sell its consulting business, and that therefore has accepted a "below market rate" price.
However, when you look at the value of businesses that are much closer to graphic design such as the advertising
mega-groups (eg. Omnicom, Interpublic, WPP), you can see that valuations have fallen by half, to about 1.5x revenues:
http://www.smartmoney.com/eqsnaps/index.cfm?story=competition&symbol=OMC
So, if you have a professional services business to sell or value, at the moment the US market is suggesting it should be valued at 0.5x - 1.5x revenues.
It will be interesting to see whether the stockmarket ends up putting pressure on the values of other professional services businesses as a result of the IBM-PwC deal.
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The views expressed this article are not necessarily those of AGDA. Please note that the information in this article is the opinion of the author only. I can therefore accept no responsibility for actions taken on the basis of this information. Copyright Andrew Lam-Po-Tang (andrew@lam-po-tang com), 1998-2008. Permission is granted to freely copy this document in electronic form, or to print, for personal use. Reprinting for non-personal use will require the express permission of the author (which I will generally be very happy to give).
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