BearingPoint acquisition to strengthen Deloitte in federal market

Bankrupt technology consulting firm BearingPoint announced late Monday that it agreed to sell its government operations to international consulting giant Deloitte, a deal that would significantly expand Deloitte's presence in the federal market, industry observers said.

Under the terms of the agreement, Deloitte would acquire almost all of BearingPoint's government operations for $350 million. BearingPoint was 93rd on Government Executive's list of top federal contractors, with more than $516 million in revenue for fiscal 2007.

BearingPoint filed for Chapter 11 bankruptcy in February when faced with $1 billion in debt and an April deadline to repay $200 million in loans. The company also announced it signed a letter of intent to sell a "substantial portion" of its commercial services business to PricewaterhouseCoopers for $25 million.

"We have concluded that a sale of the company's business units maximizes value and provides the greatest stability for all interested parties," Ed Harbach, BearingPoint's chief executive officer, said in a statement. "We are pleased that several parties have expressed interest in purchasing the majority of the company."

A BearingPoint spokesman said its government clients should not see any changes in service if the deal is approved. Deloitte did not respond to a request for comment.

A source close to BearingPoint said the company's employees who serve the public sector generally welcomed the news of the acquisition because it indicates some stability in the wake of the company's bankruptcy filing. That is not true for employees in the commercial side of the business, where their future is less clear because the agreement with PricewaterhouseCoopers is not solid.

The deal with Deloitte is not final because BearingPoint is still open to higher offers. If none emerges the deal would be finalized in four to six weeks.

"The acquisition of BearingPoint's Public Services practice would be a compelling strategic transaction that would significantly accelerate the expansion of our federal government services business," Deloitte officials said in a release. "If we ultimately have the winning bid and are able to consummate this purchase, we are confident that the BearingPoint team would fit seamlessly with our existing, highly talented government services group, allowing us to meet our long-term strategic objectives and further enhance our services for clients."

BearingPoint holds contracts with the Defense, Health and Human Services, and State departments, among others. The company's work includes economic policy in Iraq and Afghanistan and on government 2.0 initiatives such as GovTwit, a directory of federal officials who use social media, according to BearingPoint spokesman Steve Lunceford.

BearingPoint has won new business with the government despite its recent Chapter 11 filing, he added. "If you look at [BearingPoint] coming together with Deloitte, you're putting together two pretty complementary organizations," Lunceford said. "I think it's going to be something that's very beneficial at the end of the day for both organizations. If [clients] felt any sort of ambiguity due to the Chapter 11, this helps alleviate even more so some of those concerns, so it continues to be business as usual."

The public service division of BearingPoint had about $1.3 billion in revenues in fiscal 2008, and Deloitte's government business was about $1 billion, he said.

The acquisition "certainly makes [Deloitte] a pretty formidable player in the market," said Ray Bjorklund, senior vice president and chief knowledge officer for FedSources, a consulting firm in McLean, Va. "When you look at Deloitte roughly doubling itself, that's adding lots of capacity, customer base and sources of talent to tap into across the whole enterprise."

These acquisitions have little effect on the actual on-site projects of the companies involved, but can create a backlog of paperwork on the administrative side, he said. There also could be subtle changes in pricing from the consolidation of overhead costs between the two companies and the removal of a significant bidder on technology services contracts, Bjorklund added.