HP buys EDS for $13.9 billion

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.
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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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BY Liam Lahey
Source：eChannelLine