Two king-pins in the technology industry announced Tuesday a merger agreement valued at $13.9 billion, with Hewlett-Packard Co. (NYSE: HPQ) set to acquire computer consulting firm Electronic Data Systems Corp. (NYSE: EDS) in an effort to compete more aggressively with rival IBM in the technology services business.
The deal, which is set to close later this year, will more than double HP's revenue derived from I.T. services, which the company says amounted to $16.6 billion in fiscal '07.
The acquistion will produce a new services group under the EDS moniker with an HP tagline. Known as "EDS -- An HP Company," the services group will be based in EDS's current headquarters in Plano, Texas, with Ronald A. Rittenmeyer, the current CEO of EDS, continuing at the helm.
Enough To Beat IBM?
Combining forces with EDS makes HP "a lot more competitive by having a whole lot more services personnel," according to Roger Kay, principal analyst with Endpoint Technologies. "IBM is the gold standard. This gives them a better shot at it."
HP's roots in services go back to its 2002 acquisition of Compaq, which itself bought Digital Equipment Corporation (DEC) back in 1998. "They have a pretty good services group, but they wanted to compete with IBM," Kay said. "This puts them closer to that goal."
One question is how well the companies will integrate, but Kay doesn't expect many problems on that front. HP CEO Mark Hurd is "known as good at integrating," Kay said.
'Significant Premium' for Shareholders
The new EDS will provide a broad array of enterprise-oriented consulting services, such as IT outsourcing of services for the data center, networking services, managed security services, etc. The companies will offer application development, modernization and management, integration, as well as related technology services.
In addition, the 'new' EDS will handle business process outsourcing, including health claims, financial processing, customer-relationship management (CRM), and human-resources outsourcing.
Taking the Hill
Together HP and EDS are targeting a wide range of industries -- everything from government to health care to energy. Other sectors include manufacturing, financial services, transportation, communications, consumer industries, and retail.
EDS was founded in 1962 by Ross Perot, who started the company by buying unused time on a life-insurance company's IBM 7070 mainframe. The following year, EDS invented the facilities management agreement by signing a five-year, set-price contract with Frito Lay. Perot left the company in 1986 when it was acquired by General Motors, and later ran for the U.S. presidency as an independent candidate in 1992. In 1996, EDS was spun out from GM to become an independent, publicly traded company.
The original incarnation of EDS under Perot was a "hard-charging, take-that-hill kind of outfit," recalled Kay, who once interviewed for a job with the company. "I was impressed with their efficiency if not their humanity."
Under the terms of the merger agreement, HP will pay $25 for each share of EDS common stock held at the closing of the merger.