HP Invent...: HP to buy EDS for $13 billion-plus; biggest HP deal since Compaq purchase

May 13, 2008

HP to buy EDS for $13 billion-plus; biggest HP deal since Compaq purchase

Three obstacles that HP and EDS will need to overcome in order for the deal to succeed :

1/Go global : U.S information-technology services companies are in a period of upheaval right now due to the emergence of companies in countries like India that can do a lot of the same work at a cheaper price. IBM and Accenture have both adapted to the new global marketplace, adding staff around the world. EDS and H-P have been slower to globalize. In order for the combined company to substantially improve its margins and win customers looking to cut costs, it will need to shift more work overseas.

2/ Vendor independence : one of EDS's hallmarks was that it didn't have a vested interest in selling its customers software and hardware from any one tech vendor. That independence is now gone: Even if H-P services tries to position itself as vendor agnostic, customers will still be suspicious every time they receive a recommendation for H-P equipment. One mitigating factor: The PCs and other tech equipment H-P sells is fast becoming a commodity. H-P CEO Mark Hurd could be betting that in a few years businesses won't care what company they buy this equipment from because it will all be the same.

3/ Culture clash : forget about how well EDS's suit-wearing consultants will fit in California. The bigger culture clash is between a product-centered company, H-P, and one focused on operations, EDS. Of course, the combined company will be so large and operate in so many different places that it's hard to imagine these legacies mattering as much as, say, how the new company adapts to the various cultures around the world it is sure to expand into.

Source : Peter Allen, a partner at the outsourcing-advisory firm TPI.

1 comment:

Anonymous said...: More with IDC Comment :

"In Europe, the combination will create a giant with combined IT and business services revenues during calendar 2007 of $13.3 billion, ranking it number 2, but still behind IBM with $16.8 billion.

On the one hand, the two companies would complement each other:

· Geographically: HP is quite well balanced across Europe, with a good position in Germany and a weaker position in the U.K., whereas EDS is strongly U.K. biased.

· Vertically: The two companies should hold a solid position in the European public sector, manufacturing, financial services, and telecommunications verticals.

· Service lines:

o EDS is among the world leaders in IS (datacenter) outsourcing, including mainframes, a relatively weak area for HP with its heritage in the desktop and midrange servers. Both companies are among the world leaders in the network and desktop management space. There should be potential for economies and benefits of scale in this infrastructure outsourcing space.

o Both companies are strong in infrastructure and weaker in application space, and both are focusing on growth in application services: EDS has a broader legacy modernization approach, whereas HP is more focused on SAP migration.

o Both companies have focused strongly on building up competence around SAP. EDS has made several announcements lately, including an alliance with PwC, and HP has focused broadly on SAP implementation and application management, as well as creating a "factory" approach to SAP 6.0 upgrade.

o HP has focused strongly on support, an area that EDS sold off in Europe late in 2006.

· Offshore: HP is still perceived as being weak in offshore, and will win through access to EDS' resources. EDS gained momentum recently through the acquisition of Mphasis, bringing it on par with leading competitors, if not with IBM and Accenture.

· BPO: EDS is the stronger party, but far from strong in Europe. HP has some thought leadership, but very limited customer base. There could be synergies here.

On the other hand, there are drawbacks:

· Business versus technology orientation: EDS used to be seen as a swashbuckling IT consultant as much as an infrastructure outsourcer in the 1990s, but focused far more on the infrastructure space in this decade. In Europe, EDS is consequently perceived as a "techie," although arguably less so than HP. The recently announced EDS-PwC alliance focused around SAP-based services could in part compensate for this.

· Partners: Both companies are strongly partnership oriented — EDS has created the Agility Alliance, coordinating sales with its partners in Europe, and HP has a strong alliance with BT. How does the EDS alliance (which includes Sun) match with HP making its own hardware, and indeed with HP's alliances?

· HP has a strong alliance with BT. EDS is rebuilding its own network, arguing this will give it differentiation. How does this circle get squared?

· And of course the big one — customers. Part of HP's strategy here is clearly building market share in key areas. However, it is unclear if all of EDS' existing customers — banks — will be euphoric about handing their operations over to HP. HP is a company with a very different culture and history to EDS — and unless HP can guarantee that the very elements that supported the choice of EDS in the first place will not disappear, this shift could make some customers very nervous. Combined, the two companies have 39 outsourcing contracts for a total value of $12.8 billion up for renewal in Western Europe in the next 18 months. This means a lot of "customer convincing" will be needed and not an insignificant amount of risk.

Conclusion

We can see some real synergies in this deal — mostly cost (profitability) synergies rather than revenue (growth). That makes the deal less exciting, but also risky. Investors don't want excitement from the likes of HP and EDS — they want better profitability and reasonable, predictable growth. This deal could give them that if all goes well. That's a big "if," of course.

Another major acquisition for HP risks creating real organizational and cultural strain at HP, not to mention at EDS. Continuous change for employees can only be cause for disruption. Merging the "DNA" of the two organizations will be painful. HP investors — given the pain of the Compaq acquisition — are understandably skeptical. HP shares fell 5% yesterday evening, while EDS' rose 27%.

We recently described HP as an excellent infrastructure "plumber" — a reliable, skilled contractor that can handle the complex-but-dull stuff that the "architects" and application "builders" of the industry can't or don't want to handle. This deal could create a "super plumber" that extends that story right across the whole infrastructure, well into the datacenter, where HP is currently weaker than IBM and, of course, EDS. So, it could strengthen both sides.

That leaves the combined entity very strong on infrastructure, but with a relatively light (compared to IBM and Accenture, anyway) business-level dialogue with the customer. And business-level dialogue is no longer a luxury, it's an essential part of winning the higher-margin and indeed higher-growth services such as application management and BPO. So for the combined entity to supplement the infrastructure focus with higher-growth and higher-margin services, it would still need a much better story in business and IT consulting. We don't mean standalone consulting (with its own brand, as EDS unsuccessfully tried with AT Kearney). We mean the deeply integrated, "embedded" consulting that is increasingly a core part of the way the industry goes to market.

Lastly, this is a definite wake-up call for Logica, Capgemini, Atos Origin, and others. Their shareholders will likely worry about the ability of these firms to continue to compete effectively in the IT services market — and will likely put senior management under increasing pressure to take decisive action. In essence, whether this deal goes through or not, HP has just thrown a big stone into the IT services pond and this should definitely scare some of the smaller fish. "; 5:13 AM, May 14, 2008

I leave you now HP

They say the "lights will still go on at HP" without me here. I wonder who will miss the love I have given this company, I wonder who will miss how much I cared about The HP Way. I often chose to come in early, work through lunch and stay late. I thought what I was doing was so important. Especially when it was for customers or when it was something so new, What we were doing would change the world. But the times I was the most selfless, was for my co-workers who needed me. Maybe it was to review a document, give feedback, change the code, whatever... This is what I will miss most, knowing that I was important to my co-workers. I will miss the lifelong friends I have made We had so many days of meaningful work together. We made a difference and we knew it. We understood the power of a team. I will miss that where ever I went in the world, I always found great HP people. People who cared as much as I did. People who loved our HP culture enough to keep it precious. These are the great HP people who shared in success And when times were tough were the first to say, "We'll get through it together". I will miss the picnics and the beer busts. But mostly I will miss the managers who believed in me, who challenged me, who told me that I was a leader and important to the business. I will miss the profit sharing checks. Not for the money but because I knew I was a part of something so much greater than myself. I will always remember the handshake and the "Thank you" of the general manager. Those were some of my favorite times. I will miss the laughter and excitement of creating new businesses and improving processes. I will miss the serious times when customers' needs were on the line. We were all engaged for one purpose. It was our finest hour. I will miss saying I helped create a great HP product. And now will relish in how it changed the world. I wouldn't have missed that for anything. How proud I am to have been an HP employee. I would have worked for free for you HP. I loved you that much. You should know that I cried when Bill and Dave died. I had finally figured out what values really mean to a company's culture. My only regret is I didn't have a chance to say thank you. I'll take that learning with me as a final gift of all the years, of the great company Bill & Dave built. I leave you now HP.