HP-EDS deal spurs range of customer reactions

Most don't see major disruptions from the planned $13.9B deal

Customers of Hewlett-Packard Co. and Electronic Data Systems Corp. offered a range of reactions today to HP's $13.9 billion bid for the massive outsourcing company.

HP will benefit from EDS's talent pool, but the specter of layoffs -- which EDS President and CEO Ronald A. Rittenmeyer indicated would be possible as the companies integrate -- raises concerns about customers' existing deals, said Nina Buik, president of Connect, an HP user group with about 50,000 members. Connect was formed by the merger, formally announced last week, of three previously separate user groups.

"From a business perspective, I understand when you consolidate staff there's going to be duplicate jobs," Buik said. "I want to make sure the customers are still getting the level of service they signed up for. That would be my concern."

HP's pending purchase, which will bring it into close competition with services leader IBM, has been approved by both companies' boards of directors and is expected to close in the second half of this year.

The deal will result in a new unit called "EDS -- an HP company," based in Plano, Texas, where EDS has its headquarters. Rittenmeyer will lead the new unit and report to HP CEO Mark Hurd.

Joe Lovetere, president of Hub Technical Services, said he was surprised by HP's move but called it "exciting" and said it isn't likely to be a threat for his South Easton, Mass. company, which resells HP's hardware and provides services. "I don't think that it affects our business in terms of the market segment we have," he said, explaining that his company serves the public sector and small to medium-size companies. EDS goes after the biggest accounts, Lovetere said.

One of those is Xerox Corp., which has spent billions of dollars on EDS services during the past couple of decades. The company signed a $263 million deal in April that calls for EDS to manage and support its end users, service desk and mainframe operations. The new deal marked a milestone in a long relationship, providing Xerox with "flexibility in the event of changing business circumstances," said Carl Langsenkamp, director of public relations at Xerox.

The pending acquisition could well qualify as such, but Langsenkamp declined to speculate on whether Xerox would, in fact, look to alter the contract.

The company has a "twofold relationship" with EDS, partnering with it as a member of EDS's Agility Alliance, which brings together offerings from a range of vendors into an "agile enterprise platform," he said.

Meanwhile, HP and Xerox compete in the office printing business, but Langsenkamp downplayed the potential impact. "This move seems to retrench them in IT outsourcing, but not document management," he said.

HP's hardware division presents another potential wild card for customers, should HP attempt to move EDS clients over to its computing platforms. Hurd insisted during a conference call today that EDS would resist such an obvious temptation and remain hardware-agnostic.

That scenario is believable, Lovetere said. "EDS is still a stand-alone business with a core group of customers and a core group of relationships. Trying to force customers onto platforms they don't have comfort level with doesn't make good business sense."

The acquisition will benefit both companies in the long run, said Rick Morris, CIO at Dollar Thrifty Automotive, which signed a five-year IT services contract with EDS worth $150 million to manage application development, network and hardware management. "I would be more worried if they were merging with a lesser-known commodity than HP," he said.

With HP being a products company and much of EDS's revenue coming from infrastructure outsourcing, the acquisition is a natural way to try to expand in the services business, Morris said. The combined company could lower Dollar Thrifty's IT operations costs by bringing in HP's product culture and more scale, he said, adding that HP could also reinforce and enable EDS's strategy of making business applications for the travel and transport industry.

Still, there are concerns. EDS has a big focus on the travel and transportation industry, and Morris questioned whether HP would retain that vertical focus. Questions also remain about HP's ability to effectively integrate EDS's operations and culture, Morris said.

"The HP-Compaq merger seemed pretty messy; the major thought would be, 'Would they execute this better?'" Morris said. HP's acquisition of Compaq for $25 billion in 2001 was considered a failure, since the company didn't generate hardware profits as a result. Former CEO Carly Fiorina, who oversaw HP's purchase of Compaq, was replaced by Hurd.

While the deal could present issues for some vertical markets, it could translate to better IT integration for health care organizations, said Elizabeth Messina, CIO at Blue Cross/Blue Shield Arizona. Blue Cross already uses HP hardware and recently renewed a contract with EDS for claims-processing hosting in March.

Blue Cross has been an EDS customer for 15 years, and the acquisition could allow HP to expand its offerings, Messina said. "This allows [HP] to come forward with hardware solutions with services to provide at competitive prices," Messina said.

The EDS deal could overall catapult HP near the top of the IT services market, which was worth $748 billion in 2007, according to recent figures from Gartner Inc. IBM led the market with about $54 billion in revenue, followed by EDS with $22 billion. HP was in fifth place with revenue of $17 billion, behind Accenture and Fujitsu.

Peter Sayer in Paris contributed to this report.

Copyright © 2008 IDG Communications, Inc.

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