Will Acquisition of EDS by HP Ruffle IBM?

In a bid to cool off the heat in the IT services space, HP announced the purchase of Electronic Data Systems Corp. (EDS) for the price of $13.9 billion, or $25 a share. The acquisition will boost HP Services’ initiative to stand head on with IBM, the number-one player in the services space. Analysts say that the combined entity would have revenues of U$126 billion, and services revenues of US$39 billion and HP narrows the gap between the two companies to US$15

billion from approximately US$38 billion. And, HP/EDS would consolidate its position as the largest IT company in the world and the merged entity would be the second-largest services company in the world.

As per the deal, HP intends to establish a new business group, to be branded EDS – an HP company, which will be headquartered at EDS’s existing executive offices in Plano, Texas. HP plans that EDS will continue to be led after the deal closes by the EDS Chairman, President & Chief Executive Officer, Ronald A. Rittenmeyer, who will join HP’s Executive Council and report to Mark Hurd, HP’s Chairman & Chief Executive Officer.

While Mr. Rittenmeyer said, “First and foremost, this is a great transaction for our stockholders, providing tremendous value in the form of a significant premium to our stock price. It is also beneficial to our customers, as the combination of our two global companies and the collective skills of our employees will drive innovation and enhance value for them in a wide range of industries. In addition, our Agility Alliance will be significantly strengthened.”

Mark Hurd says, “The combination of HP and EDS will create a leading force in the global IT services. Together, we will be a stronger business partner, delivering customers the broadest, most competitive portfolio of products and services in the industry. This reinforces our commitment to help customers manage and transform their technology to achieve better results.”

According to Phil Hassey, Vice-President, Services Research, Springboard Research, overall, it would give strength and market leadership to HP/EDS in the infrastructure services market for both support and outsourcing service delivery models. In addition, the enhancement of the consulting and SI business of HP would be significant, although this will still clearly trail IBM and Accenture from a revenue and market leadership perspective.

The transaction is expected to close in the second half of the calendar year 2008 and to more than double HP’s services revenue, which amounted to $16.6 billion in fiscal 2007. The companies’ collective services business, as of the end of each company’s 2007 fiscal year, had annual revenues of more than $38 billion and 210,000 employees, doing business in more than 80 countries.

HP anticipates that the transaction will be accretive to fiscal 2009 non-GAAP earnings and accretive to 2010 GAAP earnings. Significant synergies are expected as a result of the combination.

However, there is anticipation that integration is a big challenge, but Mark Hurd being a person from the same cultural city where EDS is headquartered, there will be no problem like that happened during HP Compaq merger.

Acquiring EDS advances HP’s stated objective of strengthening its services business. The specific service offerings delivered by the combined companies are: IT outsourcing, including data centre services, workplace services, networking services and managed security; business process outsourcing, including health claims, financial processing, CRM and HR outsourcing; applications, including development, modernization and management; consulting and integration; and technology services. The combination will provide extensive experience in offering solutions to customers in the areas of government, healthcare, manufacturing, financial services, energy, transportation, communications, and consumer industries and retail.

According to the analysts, HP had been shopping around for a significant services firm for many years now, since it tried (fortunately unsuccessfully) to pay US$18 billion for PWC in 2000. They have looked at firms such as CSC, Bearing Point and, in some respects, Accenture, but to date have held off arguably waiting for a transforming deal such as EDS.

Now, finally, the new outfit with more than the brand of HP will give a tough competition to IBM and other services providers. The following table provides some key metrics for the two firms, and the merged entity:

Benefits 
As per springboard research analyst, the scale of services capabilities for the HP/EDS will be number one, two or three in the key markets for IT. HP’s fledgling and limited BPO business will get significant scale, particularly in the processing side, as will IT Outsourcing and Consulting and Systems Integration. EDS and HP have very limited competitive overlap, their services focus has been in different markets and focus areas. The combined entity will get the attention of virtually every targeted CEO and CIO due to the increased client list and momentum.’Whilst no vendor has truly done well in the mid-market, HP has the products to win a strong share. EDS can work to productize its capabilities to make it more attractive and viable in the space.

HP has leadership in key verticals such as Communications and Manufacturing. However, EDS will give significant boost to the financial services, Transport and distribution, and particularly public sector markets, traditionally weak markets for HP in most services geographies.

Key Challenges

* Currently, there is no “head” of services at HP. Each of the three HP Services business units report to the respective heads of TSG (Technology Systems Group). The balance is significantly affected by this transaction. So, there is going to be some fundamental change in the HP structure to encapsulate the new scale and reduce the reliance on HP product for HP Services.

* Employee retention will also be the key factor. Clearly, there will be some redundancy in terms of the integration of the organizations. This needs to be handled in a way that it does not impact on the satisfaction of employees, productivity or morale. HP has been in this environment before, and has managed to achieve a reasonable success.