HP announced this morning that it will pay $13.9 billion for IT services company Electronic Data Systems (EDS) in a transaction expected to close in the second half of the year. EDS will remain a separate business unit known as “EDS, an HP company.”
This acquisition — HP’s largest since Compaq — makes HP the second-largest computer company in the world, behind IBM. The scuttlebutt is that’s no coincidence, that EDS is meant to help HP match IBM Global Services specifically. EDS was second-place finisher in annual worldwide services revenue with $22 billion, behind only IBM’s $54 billion, according to the New York Times. There’s also a history of HP and IBM jockeying for position in services. HP tried to buy another consulting firm, Pricewaterhouse Coopers Consulting (PwCC) in 2000, and lost out to IBM.
Illuminata analyst Gordon Haff, blogging about today’s acquisition, sheds some light on those events and how they may have led to the Compaq merger:
When last we saw this play, it was with Carly Fiorina in the role of HP CEO looking to spend a reported $17 to $18 billion on Pricewaterhouse Coopers Consulting (PwCC) in 2000. A lousy set of quarterly results turned in by HP helped to scotch that deal. Nor did it help that a lot of observers thought that HP was offering way too much for an organization with $6.7 billion in annual revenues (2001) and about 33,000 employees. IBM seemingly provided evidence of this view when it bought PwCC in 2002 for only about $3.5 billion. (A bit of an unfair comparison given the economic and other events of 2001, but still…) Carly went on to get her acquisition kicks by gobbling up Compaq instead.
So what’s different this time around? According to Haff, it’s not the idea, but its execution. Rather than looking to pay 2x the revenues of PWC, this time HP spent less than the $22 billion annual revenue of EDS. Haff also points out, “Mark Hurd has made remarkably few changes to HP’s strategic direction since he took over. . . .The difference from times past is that Mark has a track record for keeping things ship-shape.”
Tom Foremski at Silicon Valley Watcher, commenting on rumors of the deal yesterday, pointed out some of the risks that HP still faces, such as a falling stock price for EDS in recent months and the potential for such a large acquisition to be a drain on the company. “HP would still need to gain a high-end IT consultancy business in order to compete with IBM,” he added.
Meanwhile, HP is far from slowing its services campaign, also reportedly in talks to buy billions of pounds worth of data center facilities from British Telecom in the UK, presumably the better to make a matching European services push. I wonder if somewhere in the midst of all this is a plan to take on EMC’s Fortress as well, and redeem Upline at the same time.
The EMC factor is another interesting wrinkle. According to a note sent out by Wachovia analyst Aaron Rakers this morning, EMC shares could come under pressure from the deal because EDS is one of its preferred partners. “Some industry sources suggest that EDS could generate as much as $200 million in EMC revenue. In Apr 08, EMC extended its EDS relationship with new Information-centric Consulting Services (leveraging RSA offerings).” Other members of EDS’ partner program include Cisco, Sun Microsystems, Microsoft, SAP, Oracle and Xerox.