PwC, one of the Big Four professional services firms, has announced plans to buy corporate consultancy firm Booz & Co for undisclosed terms. The deal, which is subject to approval by Booz's partners next month, is part of PwC's planned expansion of their business into areas beyond auditing. $1 billion (£622 million) has been committed to growing PwC's global operations over the next three years.
Although PwC has acquired several small consulting firms since 2009, the purchase of Booz & co is expected to be their biggest for several years. As a result of the deal, PwC will control approximately 8 per cent of the consulting market.
A consultancy arms race
PwCs purchase of Booz & Co continues the recent trend among the Big Four of expanding their consulting divisions, which is a reversal of the position the majority of the Big Four took over ten years ago, when all of them except Deloitte sold off their consulting arms. Following the Enron accounting scandal, the Sarbanes-Oxley law was passed in the US in 2002, barring firms from doing consulting work for audit clients.
Fearing their consulting division would become less valuable under this new law, PwC sold theirs off to IBM for $3.5 billion. However, the new law proved to have little impact on consulting revenues at Deloitte. Realising their mistake, PwC and the rest of the Big Four have had to backpedal.
Good for you, good for me
Increased investment in consulting is especially important for PwC as audit revenues have begun to flatten in developed markets. On the other hand, their consulting business revenue has grown by a fifth in the last two years to $9.2 billion. However, what their consulting business has previously lacked is the prestige associated with the Booz & Co name, particularly in North America and the Gulf. Although Booz has only 3,000 staff to PwC's 184,000, the consulting firm has more than double the number of strategy experts.
The deal should also be good news for Booz, who, like other medium-sized consulting firms, have struggled to compete with bigger rivals like Bain & Company. For firms lacking significant clout or a niche specialism, finding a buyer seems to be the best option, and Booz seem to have been shopping round for one for some time. Three years ago an attempted merger with AT Kearney fell through, as did a more recent one with Accenture.
What comes next?
Should the Booz partners approve the deal, it remains to be seen how the companies will co-exist. Although the deal has been referred to by both sides as a merger, the vast difference in size makes it hard to see how Booz & Co can avoid being absorbed into PwC. Instead, it's likely the company name is all that will remain.
Understandably, this could cause some clashes at boardroom level, and former consultant Marta Szczerba says the difference in culture between the two firms could pose problems. "Consulting is a people industry and Booz & Co consultants view themselves as members of the intellectual elite rather than just accountant managers. I suspect a few will be looking for alternative job opportunities should the deal progress."
As well as navigating internal conflicts, PwC will have one eye on EU regulations which could cap advisory fees earned from clients audited by the same firm, as well as force clients to rotate auditors.
Care will also need to be taken that there are no conflicts of interest between the existing clients of PwC and the new clients taken on through Booz. The Public Company Accounting Oversight Board, responsible for regulating audit firms, has announced an interest in the issues of independence the deal will raise. Should PwC prove to be capable of navigating these challenges, the rewards of investing in the growing business of consultancy should be extremely fruitful.