PriceWaterhouseCoopers grabs Chicago’s Diamond

By Michael Oneal
Posted Aug. 24, 2010 at 4:12 p.m.

Clarification: An earlier version of this story reported that a “disgruntled employee” had posed a question to Diamond management during a conference call. The moderator and a transcript of the call had identified the caller as an employee. The company said he was an investor in the company, not employed by Diamond.

In Chicago’s second big consulting industry transaction this summer, PriceWaterhouseCoopers has agreed to acquire Diamond Management & Technology Consultants Inc. for $378 million.

The deal sent Diamond shares soaring Tuesday as the market reacted to news that investors in the Chicago-based firm will receive $12.50 per share in cash, a 31 percent premium to the company’s Monday close of $9.54 a share.

The companies said Diamond’s more than 600 employees worldwide will be folded into PWC’s advisory practice as the New York-based accounting giant seeks to rebuild a consulting business after selling its former consulting unit to International Business Machines Corp. several years ago.

Diamond, which was founded in 1994 by Andersen Consulting veteran Mel Bergstein, will give PWC a board-level strategic consulting practice with a lucrative client base across a variety of industries.

“There’s a clear strategic fit between PWC’s assets and aspirations and Diamond’s positioning,” said Diamond Chief Executive Adam Gutstein during a conference call with investors.

The deal would hand Diamond management, directors and employees around $113 million for their 30 percent stake in the firm. Bergstein would clear $14.2 million for his 4.1 percent stake. Gutstein, who owns around 2 percent of the outstanding shares, would get about $7 million.

Diamond currently occupies the 30th floor and most of the 28th and 29th floors in the John Hancock Center on Michigan Avenue. What will happen to that office, which is largely administrative, has “yet to be determined,” according to Diamond spokesman David Moon. Gutstein said there is some administrative overlap with PWC, but took pains on the call Tuesday to emphasize that the merger is a “growth play” and will ultimately provide greater opportunity for Diamond employees.

The firm employs about 200 people who live in the Chicago area, Moon said, and has offices in New York, Hartford, CT, Washington D.C., London and Mumbai. Consultants make up 527 of the firm’s total employment of around 643, documents show.

The move highlights the economic pressures consulting firms have been facing in recent years. The deal follows Aon Corp.’s $4.9 billion acquisition of Hewitt Associates in July as those companies sought to bolster their strength in the health benefits consulting. Gutstein said a similar strength-through-consolidation logic informed this deal. PWC will give Diamond more global reach, scale and investment resources, he said.

Investor Steve Salopek, the co-portfolio manager of the ING Small Company Fund, pointed out that while Diamond’s business of providing strategic advice to boards of directors has thrown off considerable free cash flow over the years, its stock price has suffered from the firm’s lack of scale.

Diamond had revenue of $177.2 million in its fiscal year ended in March, a 16 percent increase from the year before and has projected another 25 percent increase this year. But its earnings have tended to be volatile, Salopek said, because the firm is small enough to that fluctuations in client billings can have a big impact quarter to quarter.

In the late 1990s, Diamond’s stock soared to around $100 a share as investors flocked to a firm viewed as an Internet play because of its many assignments advising board on how to meet the digital future. But the stock crashed in the post-bubble period and has never come close to recovering those lofty heights. Salopek said investors have penalized it for erratic profits and during the worst of the economic downturn last year, the stock dipped close to $2 a share.

Indeed, the first question on Diamond’s conference call came from a disgruntled investor who said he bought into his position in the company when the stock was at $80 and accused management of “destroying my investment.” Salopek, however, noted that Diamond’s stock price back then was inflated by the market bubble and never should have been that high.

Diamond has been on an upswing recently. Pretax earnings of $15.8 million in fiscal 2010 compared to $3.7 million in 2009. Operating cash flow sprang to $17.4 million from an adjusted level of $4.8 million the year before. Diamond’s client base shrank to 88 in fiscal 2010 from 99 the year before as the number of new clients dropped to 27 from 43. But revenue per professional inched up to $367,000 from $315,000.


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