NEW YORK (CNNfn) - Hewlett-Packard's talks to acquire PricewaterhouseCoopers' management consulting operations for up to $18 billion have caused a major credit rating firm to place the company's debt ratings under review.
The credit rating company Standard & Poor's on Tuesday placed its ratings on Hewlett-Packard (HWP: Research, Estimates), and its subsidiaries under review, "with negative implications" because of the expense associated with the potential acquisition.
"If the proposed transaction is finalized, S&P would meet with management to discuss HP's prospective capital structure, business mix, and integration issues before resolving the CreditWatch listing," S&P said in a statement issued Tuesday.
If a company's debt is downgraded, it usually becomes more expensive for the company to borrow money in capital markets in the future. It's especially important for large, multinational companies to maintain a high rating in the commercial paper market, which is the market for very short-term obligations issued by banks and industrial companies.
S&P now rates HP's commercial paper "A-1+" which is its highest rating for that type of security.
"If the ratings are reviewed and subsequently downgraded, S&P does not expect the commercial paper rating to be lower than A-1," S&P's statement said.
Consistent financial performance
As of July 31, HP had about $5 billion of cash and short-term investments. On the liability side of the balance sheet it had $1.6 billion of short-term borrowings and $3.4 billion of long-term debt.
S&P now rates HP's senior unsecured debt "AA-" which is a high investment-grade rating. That rating reflects HP's $42.4 billion of revenue last year, its dominant position in the laser/inkjet printer market, and its important positions in the personal computer and server markets, S&P said.
"The company's historical financial performance has been very consistent, despite quarterly fluctuations in growth and profitability," the credit rating agency said. "Responsive control of expenses and headcount have enabled HP to maintain annual operating margins [before depreciation and amortization] of between 12 percent and 14 percent and return on permanent capital of 20 percent or better."
Under the stewardship of Carly Fiorina, who took the reigns as chief executive last summer, HP has been moving more aggressively into the information technology services area, although it still remains the company's smallest line of business.
During its fiscal third-quarter ended July 31, HP said revenue from its IT services business rose 17 percent to $1.8 billion. That unit's profit was $178 million, a 42 percent increase from $125 million in the year-earlier quarter.
SG Cowen analyst Richard Chu said Monday that HP had $7.2 billion in services revenue in 1999, $1.5 billion of which came from consulting. The PricewaterhouseCoopers deal would effectively double that, Chu said. PricewaterhouseCoopers reported that its consulting business' revenue in 1999 was $4.96 billion, up 27 percent from the previous year's total.
The S&P announcement comes the same day that HP introduced its Superdome high-end UNIX server, which the company says is the fastest server in that market, at twice the speed of the HP V-Class server.
HP officials weren't immediately available for comment on S&P's announcement.