HPs Big, Fat Services Move

On May 13, HP announced that it was likely to buy services giant EDS for over

$13 bn.

The deal, if it goes through (by year-end), would be a coup for HP. And it

would reshape the tech landscape.

For a start, it brings HP into close competition with IBM.

HP is the worlds largest IT company, at $104 bn in 2007, versus IBMs $99 bn.

But those revenues mostly come from (lower-margin) products such as PCs. Much of

HPs bottom line comes from consumablesink and toner cartridgesand not enough

comes from services. So a big services acquisition was always on the cards

(since Carly Fiorina tried buying PwC). And EDS, established 1962, defined the

outsourcing business.

IBM made the transition from products to mostly services several years ago,

spinning off its PC business to Lenovo. That helped make it rather profitable.

In 2007, it had $10.8 bn net income (11%), versus HPs $7.3 bn (7%). IBM picked

up a tenth of the $550 bn global tech services pie: its top player.

Prasanto K Roy pkr@cybermedia.co.in

HP remained a product company, with three divisions: PSG (personal systems),

IPG (imaging and printing) and TSG (technology solutions). It is through TSG,

which sells servers and storage, that HP ramped up services. Sort of. Its

reached #5, well behind IBM, with 3% share ($16.6 bn) of the pie.

With the $22 bn EDS, HPs services will jump to second place with a 7% share,

ahead of Fujitsu and Accenture.

In India, HP has done better, with services at 11% of the Rs 9,663 crore pie

for 2006-07, but here again, services got IBM India 37% of its Rs 3,380 revenues

(Dataquest estimates).

Owning EDS will also let HP compete better with Dell globally, and especially

in the USA. Dell and EDS (both Texas-based) are strong allies, and bid for big

contracts together, one providing computers, the other services.

So globally, at least two tech majors, Dell and IBM, would worry about this

deal. So would Indian services majors such as TCS and Infosys, with the global

top threeIBM, HP and Accenturebuilding up a mammoth India presence. HP would

add to its nearly 30,000 India employees not just EDS, also MphasiS, which is

60% owned by EDS.

Will it work for HP? Any megamerger is tough, especially when it involves

buying such terribly different culture and a slow-growth giant, and if synergies

are to be leveraged for cost savings. The culture clash would beat anything HP

encountered with Compaq. (EDS would stay a distinct entity, though, called EDS:

An HP company.)

But unlike when HP bought Compaq, the synergies are at least a lot clearer

with EDS.