HPs EDS Buy: What Now?

Finally, the IT services industry has its own big merger to boast!

The acquisition of EDS has been speculated internally in HP for a very long

time, ever since HP started becoming serious about services. When its effort to

hire IBM employees to beef up its services business di not really get off the

mark, HP actively looked out for EDS people. The first big catch was Steve

Smith, who was hired in early 2005. Though he came from Lucent, he was an EDS

veteran of 16 years. When HP hired John McCain (no, not the presidential

candidate) later that year to lead consulting business, under Smith, internal

speculations strengthened that HP was probably trying to acquire EDS. McCain,

like Smith had spent 16 years in EDS. From 2005 onwards, a few more former EDS

executives have joined at different levels, notable among them being Mark

Fulgham, the current VP of IT outsourcing.

But after Smith left in the end of 2006, and McCain was promoted to the post

of SVP to head HP services, the speculations almost ceased. McCain, despite his

long EDS stint, is a proactive offshoring champion. So, many thought HP would go

smaller acquisition(s) in India rather than a large acquisition like EDS. That

was till reports came in that HP and EDS were in merger talks.

The Equation



For HP, the choice was hard. It had to grow the services fast to be a

sizable competition to IBM. The trade-offs were three: size,

quality/profitability, and cost of acquisition. Large Indian companies were

clearly beyond its reach and have never showed any inclination to get acquired.

The tier two Indian companies, though far more profitable and modern in their

outlook, were small and costlier. EDS was not only large, it came cheap, even

with a 25% premium to its quoted stock price. As many analysts have rightly

descried it, it was a successful bargain hunting. However, the value of the

company is only quarter the story. The two bigger challenges remain.

Successful integration is of course a challenge. HPs service offering is far

more sophisticated, high value, quality-driven, tool-based (It is a leader in

ITIL) and consulting-led much like IBM, Accenture, and the Indian firms. EDS

is the anti-thesis of that. Despite its breadth and the strength in details of

execution, it has not kept pace with changing times. To marry the two cultures

and hoping that the whole will be greater than the sum of the two will be a

Herculean task. Many analysts have also pointed out that it is a distraction

when HP was finally stabilizing.

The other challenge is EDS expensive manpower. One sizeable acquisition of

Mphasis in India notwithstanding, most of the 140,000 employees of EDS are in

the United States. Compared that to IBM, which has more than one-third of its

employees in India or Accenture, whose India manpower just surpassed its US

manpower. John McCain will have to balance between the EDS integrationwhich

will most likely come his wayand offshore ramp-up.

The other challenge, though not quite of the same magnitude as the above two,

is to decide whether to continue with the low-end BPO business of EDS, including

that in the public sector, which none of the major outsourcing firms target.

On the positive side, at least theoretically, it gives two advantages to HP.

One, EDS is a huge channel for its big boxes, storage and all that big hardware

to many traditional segments where EDS is strong. And two, it simply brings with

it customers, many of which have not changed EDS as a vendor considering the

cost of switching but are not too happy with it either. HP can add a lot of

value in those deals and make them long-term customers. You just have to ask

Ralph Szygenda, the GM CIO to gauge what that could mean for him!

Last but not the least, it upsets the strong Dell-EDS partnerships which will

hopefully be a boost for HP PC business. But the caveat there is that, if HP

tries to do that, it will severely impact its reputation as a serious services

player.

On paper, the merger will create the #2 outsourcing player in terms of

revenue. But it will not shift any boundaries. It will not affect IBM as the Big

Blues new focus on strategic outsourcing has no threat from EDS. Ditto for

Accenture. The rising Indian firms compete with different strengths offshore

execution and nimbleness. That is not exactly familiar phrases for EDS.

In the long run though, it may create another major global players if HP

manages to marry the complementary strengths successfully; if it manages to

rationalize its onshore-offshore mix; and if it manages to turn EDS customers

to long-term strategic clients for all its business. That is a lot of ifs.