News Analysis

HP invents a plan to buy EDS

It's IT Blogwatch: in which Hewlett-Packard is in talks to acquire Electronic Data Systems (EDS to you and me). Not to mention cool Huygens-esque physics experiments with metronomes and soda cans...

Patrick Thibodeau dons his thinking cap:

Both companies confirmed Monday they are in "advanced" in talks about a merger ... Mark Hurd, the CEO of Hewlett-Packard Co., likes automation, not people. Offshore labor will reduce costs, but automating things "eliminates costs," he has said. Hurd wants "lights-out data centers." He has not championed the need for developing a massive, people-intensive services organization -- which exactly what he will get if HP acquires Electronic Data Systems Corp. ... Plano, Texas-based EDS will add some 139,000 employees to HP's 159,000 workforce, but only about $22.1 billion in revenue, which is what it finished 2007 with. HP ended last year with $104 billion in revenue ... [But] the last time HP decided to merge with a large Texas-based company it did not go so well. more

Ben Worthen runs with the Hurd: [You're fired -Ed.]

H-P has been trying to boost its services business for years. The expected acquisition of outsourcing giant EDS could do that in a big way. Businesses are increasingly turning to outside firms to provide information-technology work – anything from software development and management to running a data center ... They don’t gain a competitive advantage from, say, monitoring their corporate network, and it’s cheaper to have someone who monitors 100 networks do it than to do it themselves ... EDS has revenue around $20 billion a year and has a roster of giant clients including General Motors and Royal Dutch Shell. EDS typically does higher-end (and hence higher-margin) work for these customers like designing the systems that are used for product development and manufacturing. more

Om Malik is sooo glad to have stopped talking about Microhoo:

[An] HP-EDS pairing will go down as one of the more significant developments of 2008, and its impact will be felt for years to come ... Typically, such a major deal means two things: either that the buyer has some issues with his current business or he wants to make a big bet on the future. In case of HP CEO Mark Hurd, it might be a bit of both. There is only so much market share they can carve out when it comes to printers and computers. More importantly, HP seems to be realizing that the future is about on-demand infrastructure. EDS brings to the table about 100 data centers around the planet ... HP might have finally realized that the future is about offering hardware as a service ... even though they are growing fast, BRIC Bloc remains reticent to spend big dollars on infrastructure. Offering infrastructure-as-a-service to Indian telecoms or Chinese automakers of Brazilian biofuel companies is a much easier proposition. more

Alan Shimel agrees:

Another important angle is keeping HP ahead of the pack of large Indian services firms that have been expanding world-wide over the last few years. In the global marketplace for IT services and consulting, HP and IBM may be the American based entries in a world-wide competition with Infosys, Tata, and other firms from India, China and the rest of the world.. For this reason I think it is a good move by HP to shore up a solid second place behind IBM ... EDS is certainly not the powerhouse it was 10 years ago, let alone in the Ross Perot/GM heyday. Like any company that size it is hard to make rapid change with the amount of inertia built into the system. However, they have been in turn around mode for several years ... [Hurd] is remaking this company in his own wishes if not image. So far everything he has touched there has turned out well, so lets see what he can do with EDS's 2.8% average year to year growth. more

But Vinnie Mirchandani's not so sure:

EDS could use a layer of cover. The company which just about defined outsourcing has been running hard to stay even - flat growth over the last decade ... EDS is not Accenture or PwC (which IBM acquired) or TCS or Infosys. Its major strength is still in infrastructure outsourcing (though it has been growing its application and BPO capabilities nicely). HP's outsourcing is similarly more skewed towards infrastructure. So, it is a scale play. But the timing is risky because infrastructure outsourcing is being challenged by data center consolidations, a secular decline in processing, storage and network charges and emergence of utility and cloud computing models. Not the world either EDS or HP grew up in. more

And Subba Iyer waxes serendipitous:

This may be Mark Hurd’s biggest and risky bet to carve out a bigger space in the IT services market ... Unlike the earlier acquisitions, this one is a big move and hence there is the imminent integration challenge between these 2 companies with different cultures. Given that EDS has a higher market share and also been in the IT services business longer than HP, they are unlikely to submit to the HP model easily ... So, who would call the shots — HP as the acquirer or as EDS with a big client list and a track record of delivering higher value services? We just have to see how this unfolds. Second, Mark has to transition the combined entity to the right cost structure by shifting significant resources to a low cost countries like India. At least in India both EDS and HP have operations and their merger may not create much problems. more

Here's Nick Farrell, from the United Kingdom of Great Britain and Northern Ireland:

The maker of jolly expensive printer ink, HP is close to signing on the bottom line ... In Blighty [EDS] has not had a good record. In November 2001, it was unable to finish a £300 million project to supply the UK's Ministry of Defence with a payroll system. In December 2003, it lost a 10-year £3 billion contract to run the UK Inland Revenue IT services after a series of bungles in the payment of tax credits. It ran over-budget on a project for the UK’s Child Support Agency and admitted that the whole thing was "badly designed, badly tested and badly implemented". Last year BSkyB won £709m compensation from EDS, claiming that the company's failure to meet its agreed service standards resulted not just from incompetence, but from fraud and deceit in the way it pitched for the contract. more

Of course, John Furrier plays the, "I told you so" card:

I was reporting this rumor on my blog last week. This will be a massive reorg for the computer giant HP. HP being a major player in the services business will buy EDS. Impact: massive reorg of the existing services organization. Remember the failed attempt by iCarly who tried to by PriceWaterhouseCoopers to bolster the services offering to counter IBM. Question is will this deal be the same massive integration job as experienced with the Compaq deal. Unlike iCarly, Mark Hurd had the chops to pull this off. Word within HP is that Mark is in touch with the operational machinery of HP and has the respect of this management ... [But] this is a big blow to the existing services business at HP ... these mega mergers just don’t seem to make sense when you see the massive integration. It could be years for an organization like HP to digest the culture of EDS. If HP and Mark Hurd can pull it off it will be a coup. more

And finally: synchronizing metronomes, using conservation of momentum...

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Richi Jennings is an independent analyst/adviser/consultant, specializing in blogging, email, and spam. A 21 year, cross-functional IT veteran, he is also an analyst at Ferris Research. You can follow him on Twitter, pretend to be Richi's friend on Facebook, or just use boring old email: blogwatch@richi.co.uk.

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