Analysis: Why Hewlett-Packard wants EDS

Stronger company, Big Blue chase or Compaq repeat?

Mark Hurd, 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 is exactly what he will get if HP acquires Electronic Data Systems Corp. Both companies confirmed Monday they are in "advanced" talks about a merger.

Plano, Texas-based EDS will add some 139,000 employees to HP's 172,000-person 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.

So where is the benefit to HP and EDS customers? And what are the risks? The last time HP decided to merge with a large Texas-based company it didn't go so well. The 2002 Compaq merger engendered a contentious battle and a difficult integration, and was a major reason why Hurd's predecessor, Carly Fiorina, resigned in 2005.

Are they Blue? (No.)

Hurd has rejected the idea of developing an IBM-like services organization. And although the parallels to Big Blue's offerings will be fast and furious, there are critical differences between EDS and IBM global services.

EDS is focused on infrastructure services — running data centers, help desks and networks, which gives Hurd an opportunity to replace people in a data centers with HP hardware and technology. And EDS would give HP access to a lot of data centers.

And then there's that automation question. "We have to automate more things," Hurd said at a Morgan Stanley conference in March 2007, in response to a question (download PDF) about IBM's services offerings. "When you take on a data center from a customer, a customer gave it to you for a reason. Typically, they gave it to you because it's screwed up and they don't know how to fix it. So if you don't have the tools right, all you've done is inherited a screwed-up, underleveraged capability. So you have to transform it or else you're not going to make any money either."

IBM, like EDS, provides infrastructure services. But it is also big on management consulting, and that's where they part ways. EDS tried to become more IBM-like when it acquired management consulting firm A.T. Kearney in 1995, but the acquisition never really added to EDS's bottom line, and A.T. Kearney was returned to private ownership in 2006.

A match made in ...?

Analysts aren't certain if the proposed merger will really help HP and EDS, even if they can see logic to some aspects of it.

A merger means that HP "is buying an IT services battleship," said Paul Roehrig, an analyst at Forrester Research Inc. in Cambridge, Mass. It's a move that will extend HP's global services capabilities, enrich its customer base and, in theory, drive a lot of additional services business for HP, Roehrig said. But, he added, "I'm not sure why they need to do this."

A trend in outsourcing has been a movement away from mega-deals, in which one vendor provides soup-to-nuts IT services and equipment. Today, many enterprises deal with multiple vendors to fill specific IT niches, leveraging them against each other and swapping them out as needed. That's hard to do when you're dealing with a Goliath.

"EDS won a lot of business because they were not IBM," said Peter Allen, a partner and managing director at consulting firm TPI Inc. in The Woodlands, Texas — meaning that EDS has sold its services independently from hardware products.

But Allen said the deal may make sense if acquiring EDS will put it in a better position to offer cloud-type computing services, as part of the broader user shift to service providers. "Is this part of a vision," he asked, "of how corporations will procure computing resources?"

HP already has a significant services operation, which generated about $16.6 billion last year, said Stan Lepeak, managing director at EquaTerra Inc., a Houston-based consulting firm. EDS has been expanding in human resources business process outsourcing, something HP is doing as well. "I think they [EDS] have a pretty broad range of offerings that tie closely to the HP product set," Lepeak said.

For HP, there has always been a little bit of an underdog status with IBM because of its services organization. And although competitors may knock IBM's services unit as an organization intent on selling its hardware, "the fact is that IBM doesn't hold a gun to anyone's head," said Charles King, an analyst at Pund-IT Inc. in Hayward, Calif.

"As data centers become increasingly complex and increasingly distributed, they become harder and harder for businesses to get a handle on them," said King. That will make services such as what HP can offer with EDS more appealing, he added. It will also allow HP to "compete more effectively with IBM," King said. "IBM is the company they are gunning for."

Copyright © 2008 IDG Communications, Inc.

  
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