| HP buys EDS for $13.9
billion
13 May, 2008
By Liam Lahey
Hewlett-Packard and EDS have announced that they have signed
a definitive agreement under which HP will purchase EDS
at a price of $25 (U.S.) per share, or an enterprise value
of approximately $13.9 billion. The terms of the transaction
have been unanimously approved by the HP and EDS boards
of directors.
The transaction is expected to close in the second half
of calendar year 2008 and to more than double HP's services
revenue, which amounted to $16.6 billion in fiscal 2007.
The companies' collective services businesses, as of the
end of each company's 2007 fiscal year, had annual revenues
of more than $38 billion and 210,000 employees, doing business
in more than 80 countries.
HP has historically been focused on IBM as their largest
competitor and Big Blue does have one sustaining advantage
with its IBM Global Services. HP has been working to significantly
reduce and eliminate that advantage. The EDS deal is apart
of that strategy and it imposes little customer overlap.
HP intends to establish a new business group, to be branded
EDS -- an HP company -- which will be headquartered at EDS's
existing executive offices in Plano, Texas. HP said EDS
would continue to be led after the deal closes by EDS chairman,
president and CEO Ronald A. Rittenmeyer, who would join
HP's executive council and report to Mark Hurd, HP's chairman
and CEO.
The transaction would be accretive to fiscal 2009 non-GAAP
earnings and accretive to 2010 GAAP earnings, officials
added.
Rick Sturm, founder and CEO of Enterprise Management Associates,
said in theory the deal will help HP narrow the services
gap with IBM considerably.
"With a deal of this magnitude, the devil is always
in the details," he remarked. "As with Compaq,
the question is 'how well will they be able to execute?'
. . . we could expect to see if they stay with the announced
plan, that is EDS being put in charge of HP Services, I
think we can look for some attrition on the HP side as they
get assimilated into that new EDS culture which is drastically
different from HP's culture."
"The combination of HP and EDS will create a leading
force in global IT services," HP's Hurd said in a Webcast.
"Together, we will be a stronger business partner,
delivering customers the broadest, most competitive portfolio
of products and services in the industry. This reinforces
our commitment to help customers manage and transform their
technology to achieve better results."
"This is a natural evolution in our efforts to supply
a comprehensive set of products and services at the right
value in a very wide range of industries . . . our business
service providers as well as our customers will benefit
from sharpened innovation and expanded expertise,"
said Rittenmeyer. "In services, we will have particular
capabilities in areas such as application outsourcing, IT
outsourcing, business process outsourcing, consulting and
integration, and technology and services."
Word of the acquisition saw HP's stock price take an immediate
dive, with Sturm chalking it up to market skepticism, as
with the HP-Compaq merger.
Rob Enderle, principal analyst for The Enderle Group, said
this is largely a services deal and one that is focused
primarily on outsourcing in the initial rounds.
"As services connect to sales, and they certainly
do, this will impact HP's direct channel significantly.
Impact on the indirect channel will be more limited given
the nature of this business but for those that compete with
EDS they will now find that more difficult. For those that
partner with EDS with HP technology they will see increased
strength," he said. "For those that sell into
EDS the firm will now be tied tightly at the hip to HP and
any business that competes with HP for EDS business will
likely be eliminated."
What will be the impact on HP's solution providers authorized
to sell HP Services and how will they interact with the
new services organization? Hurd insisted the deal is all
wine and roses for HP's channel partners.
"Our commitment to channel partners is in the very
DNA of Hewlett-Packard . . . I don't think there's anything
but goodness in the context of that," he said. "If
you look at our outsourcing business today, we try to make
it very complementary with our partners . . . please remind
our channel partners how much I love them."
In terms of overlap in HP's Services business and the potential
of job cuts, Rittenmeyer said the overlap isn't extensive
but changes are afoot.
"Our customers, and there are some that are in the
same space, but they're very few and far between. We're
complementary in that space today so that only provides
our customers with a better mix now," he said. "In
terms of job cuts, we are continuing to streamline our workforce
at EDS so obviously there will be some changes . . . I don't
think it changes what our efforts has been in this area
. . . it's too early to give specifics but we will be looking
at synergies."
An interesting wrinkle in the whole affair, a few years
ago Computer Associates and EDS ended up in litigation over
CA software. Eventually, a settlement was reached whereby
EDS adopted CA software as the corporate standard.
"It'll be interesting to see what happens to that,"
Sturm said. "Converting to all HP stuff, which they
can do, will be a massive undertaking that would take years
and millions of dollars even if the software is free. On
the other hand, it isn't rational to be supporting your
competitor with maintenance fees."
Meanwhile, Enderle said EDS would have to learn HP internal
politics and quickly come up to speed on how to play in
what would be a vastly different sandbox.
"This learning process can be difficult as a large
new acquisition can become a dumping ground for underperforming
employees and a quagmire of bureaucratic processes that
can grind the unit into the dust if EDS isn't careful,"
he remarked. "HP's executive staff will be operating
to drive the merger to closure; the EDS side needs to ensure
they aren't critically hurt by the process."
In addition, EDS is currently a multi-vendor provider and
locking-in with HP would create an opportunity for IBM (and
other competitors) to position EDS as HP-only and as a sales
unit -- rather than a services unit -- in existing EDS accounts
as part of competitive displacement efforts. "EDS will,
during the merger window, find it difficult to defend,"
Enderle said.
The specific service offerings delivered by the combined
companies are: IT outsourcing, including data center services,
workplace services, networking services and managed security;
business process outsourcing, including health claims, financial
processing, CRM and HR outsourcing; applications, including
development, modernization and management; consulting and
integration; and technology services.
The acquisition is subject to customary closing conditions,
including the receipt of domestic and foreign regulatory
approvals and the approval of EDS's stockholders.
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