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Focus: Being first in line
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October 10, 2000: 10:10 a.m. ET
Watson Wyatt, the first pure play HR consulting firm, ventures to market
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NEW YORK (CNNfn) - Like a soldier in the front lines, corporate consulting firm Watson Wyatt will venture warily into an uncertain IPO market this week, looking for some solid ground to plant its flag in a decidedly unstable environment.
With a $625 million revenue stream, the Bethesda, Md.-based company likely is a little too large to slip unnoticed among the broader market's increasingly volatile waves.
Complicating matters even further is the increasingly bright media glare surrounding the sale. Watson Wyatt is the first "pure play" human capital consulting firm to hit Wall Street and comes as one of its competitors, Anderson Consulting, mulls floating shares itself in an initial public offering that could reach into the billion-dollar range.
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Still, analysts note increasingly fickle IPO investors could find some value in the offering, particularly since Watson Wyatt is one of the few recognizable and fiscally stable names in an otherwise cloudy week for initial public offerings.
"Valuations in this sector are uncertain," said Irv DeGraw, research director at WorldFinanceNet.com. "This is the first 'pure play' offering and publicly traded comparables are not available. [But] unlike most IPOs, this offering resembles a value play. Its recognized reputation, substantial revenues and profitability can be expected to generate attention."
Size does matter
Formed in 1946, Watson Wyatt currently ranks among the "big four" human resource consulting firms worldwide, a somewhat enviable position considering many analysts expect a round of consolidation to take place in the next few years.
Like many of its peers, the company, which helps companies devise and implement human resource strategies, is racing to expand its business worldwide through a diversified growth strategy, including acquisitions and delivering its products via the Internet. And, unlike many companies that take their acts to Wall Street, the company also boasts a profitable bottom line, albeit modestly so.
Watson Wyatt earned $18.5 million during its last fiscal year, a slight decrease from the $20.8 million it earned during fiscal 2000. Its clientele list includes such notables as General Motors Corp. (GM: Research, Estimates), General Electric (GE: Research, Estimates) and IBM Corp. (IBM: Research, Estimates).
Still, analysts are torn on whether the company is a wise long-term play.
Analysts expect a positive first day, with predicted gains generally ranging between 20 percent and 40 percent, particularly given Watson Wyatt is floating only 5.6 million shares, or roughly 15 percent of its outstanding stock, which may push first-day demand higher.
But longer term, analysts warn investors may have to endure wild swings in the company's profitability. By its own admission, Watson Wyatt said the intense competition to secure top personnel talent in its field could adversely affect profits in future years.
The company also has aggressive expansion plans, particularly in overseas markets that could periodically drain its revenue stream. Currently, Watson Wyatt employs roughly 4,000 people in 18 countries around the world, primarily in North America, Asia and Latin America.
Ultimately, analysts advise keeping a close eye on how the company prices its IPO, expected on Tuesday evening, as a good indicator of its long-term prospects.
"The human capital sector is very hot," said Corey Ostman, co-chief executive of AlertIPO.com. "But . . . the market may value this deal as a consulting firm instead of a human capital firm. That's just not the best sector right now. People have the perspective that it's not the most profitable industry."
The company currently expects to raise $70 million by pricing 5.6 million shares in a range of $11.50 to $13.50. The offer is expected to price after the markets close Tuesday, a company spokeswoman said, and then trade on the New York Stock Exchange under the ticker "WW."
Andersen float could dwarf Watson Wyatt offer
Meanwhile, as Watson Wyatt underwriters Deutsche Banc Alex. Brown prepared their client's offering Monday, word began to filter through the IPO market that Andersen Consulting, a chief Watson Wyatt competitor, is considering an initial public offering that could be worth some $20 billion -- a level that clearly would rank as the largest IPO of all time.
In truth, Andersen is a slightly different beast than Watson Wyatt, concentrating more on management and merger advisory services than human resources policies. Likewise, global consulting firm KPMG LLP is planning to float more than 300 million shares on Wall Street later this year, raising nearly $2.4 billion.
Analysts are undecided on what kind of impact either transaction could have on the Watson Wyatt sale, although Ostman believes it actually could help keep the human capital firm from being priced more like a consulting play.
"I don't know if it really gets affected by the Andersen reports, but it will be interesting to see how it prices now. If they boost their range, that is an indication institutional investors believe it's a strong long-term play." 
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Watson Wyatt Worldwide
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