Analysts are still assessing Hewlett-Packard's announcement Tuesday that it will acquire Electronic Data Systems for $13.9 billion. Together, HP and EDS will be a tech-services behemoth with 210,000 employees worldwide in 80 countries and revenues of more than $38 billion. That figure more than doubles HP's service revenues.
HP's plans are simple: To establish a new business group. That group will be called EDS -- An HP Company. EDS Chairman, President and CEO Ronald Rittenmeyer will lead the group.
"The combination of HP and EDS will create a leading force in global IT services," said Mark Hurd, HP's president and CEO. "Together, we will be a stronger business partner, delivering customers the broadest, most competitive portfolio of products and services in the industry."
Gaining Ground on Big Blue
With this acquisition, HP moves to the number-two position behind IBM in providing IT services to the world's largest corporations. That catapults HP in front of Accenture and puts it into a strong position to sell solutions to its largest accounts.
Any time you can go into the market and become the No. 1 or No. 2 player is a good move, according to Murray Beach, managing director of TM Capital and chairman of M&A International. Of course, he continued, the deal that would have really given IBM heartburn would have been an HP-Accenture tie-up, but the EDS deal gives HP a nice jump in government and financial services.
"IT outsourcing is also at the heart of the data center, and this is a critical arena for HP. Becoming significantly more competitive with IBM in this area will [also challenge] IBM's server and data-center position," Beach said. "This is a nice strategic move from this angle. Their new government strength is an area that HP can exploit against IBM, as they should be one of the largest government-services players around, though still much smaller than Lockheed or Boeing."
Acquiring EDS advances HP's stated objective of strengthening its services business. The company has accomplished that goal and more, according to Beach. In fact, HP seems poised to give the services market a run. Similar to its product strategy, he explained, HP seems happy to build from the bottom up, going for an IT outsourcing play as opposed to a SI/Consulting/Strategy route. Either way, it's a direct challenge to IBM.
The Downside of the EDS Acquisition
Analysts aren't all sold on the deal. As Beach noted, an Accenture acquisition would have served HP better. Accenture could have launched HP to the top of the IT-services food chain virtually overnight. Add Accenture and a couple of strategic business-software components, and HP would have replicated Big Blue's business model.
"In an uncertain market, making a big acquisition splash protects your future -- as long as you can execute -- and enhances your footprint. It also eases the burden of driving organic growth," Beach said. "HP has its work cut out, but it has moved clearly into the number-two position in the services landscape. Plus they did this at a very reasonable price. This should put further competitive pressure on the Indian crowd and companies like CSC and ACS. If I were IBM or Accenture, I'd take a hard look at CSC, as they have to be a bit worried."