HP-EDS Merger

A huge story in the IT world this week was the announcement of the acquisition of Electronic Data Systems by Hewlett-Packard. Information Week reported that the deal is the largest in the outsourcing sector’s  history, and that it is the second largest ever in the IT industry overall (It’s second only to HP’s $19 billion buyout of computer maker Compaq in 2002).

Cnet says that the sheer size of the deal is daunting. The deal represents the combination of the largest number of people that the IT services sector has seen, and HP faces serious challenges when it comes to integrating two very different companies. As Cnet reports, the track record of deals like this is not very good.

However, this deal may be necessary for HP to compete with IBM, which is the most comprehensive IT services provider. Unfortunately, HP has struggled to grow its services business internally. Despite publicly stating its intention to become a leader in the outsourcing market and investing accordingly, the company often found itself behind competitors like IBM, Accenture and EDS when big deals were handed out.

With the combined resources of HP and EDS, the CEO of EDS-HP said that the company will have “the capability to serve our clients–whatever their size, location or sector–with one of the most comprehensive and competitive portfolios in the industry.”

One challenge related to the merger, pointed out by Justin Scheck on a NYtimes blog, is that the new EDS-HP will need to boost profits. Competitors have done that in part by outsourcing to places like India. However, EDS-HP may try to do this through automating functions now performed by people. HP has already started a big automation push, as the company has acquired several software-based automation companies over the last few years.

Another concern with the merger stems from the fact that EDS was technology neutral, buying from several vendors, including Sun Microsystems, Xerox, Cisco Systems, Microsoft and SAP. HP is expected to push its own hardware, which may upset delicate relationships with EDS partners like Sun. EDS-HP will have 7% of the IT services market; however, this will still be second to IBM, which has 10% of the market. It will be interesting to see how well EDS-HP is able offer a comprehensive services portfolio similar to IBM as well as cut costs in order to complete with smaller competitors.

 

8 thoughts on “HP-EDS Merger

  1. I have been talking about data warehouse appliances for some time now and it is nice to see the biggest database company in the world enter this space. In Larry’s keynote, he compared the Oracle Database Machine to offerings from Teradata and Netezza. It will be interesting to see what Microsoft comes out with as well.

  2. According to me. HP has done the right job by purchasing the Compaq as now they have a larger market share and the money they have invested in buying Compaq will be regained by introducing more products @ less prices. So I think they did the right thing @ right time

  3. Hi Mario,
    You are right that Dell will be seriously affected, because at one time EDS primarily relied on Dell’s hardware; however, HP had recently been brought in as a second provider of desktop hardware. This might have provided a warning to Dell that their future relationship with EDS was uncertain. It also might make the integration of HP’s products in EDS’ projects easier. Other EDS providers that will likely suffer are Xerox and Sun Microsystems.
    Regarding the difficulty of the merger, it is also important to remember that HP successfully completed a merger with another large company in recent years: Compaq. The lessons learned from that merger may help them better deal with problems in the new merger.
    Gabriel

  4. Well, as a current HP employee I suppose my opinion isn´t neutral but I think this integration is a step in the good way. As Gabriel
    has said it will increase HP chances of getting big outsourcing deals and compete head to head with IBM and moreover it will help to increase HP products in EDS accounts,
    Dell has a strong partnership with EDS and it will surely suffer because of this merger, HP will simply get all the associated server business I’ve no idea how to estimate the size of this, but it’s not peanuts.
    Another important reason is that in my opinion EDS was a company that wasn´t having good financial results(just compare net profit margin with its competitors)
    EDS
    Sales 22.45 Bil
    Income 642.00 Mil
    Net Profit Margin 2.86%
    Return on Equity 7.12%
    Debt/Equity Ratio 0.33
    Revenue/Share 42.20
    Earnings/Share 1.20
    Book Value/Share 19.48
    Dividend Rate 0.20
    Payout Ratio 16.00%
    HPQ
    Sales 113.05 Bil
    Income 8.38 Bil
    Net Profit Margin 7.41%
    Return on Equity 22.22%
    Debt/Equity Ratio 0.27
    Revenue/Share 43.39
    Earnings/Share 3.22
    Book Value/Share 15.74
    Dividend Rate 0.32
    Payout Ratio 9.00%
    Infosys
    Sales 4.40 Bil
    Income 1.20 Bil
    Net Profit Margin 27.21%
    Return on Equity 36.46%
    Debt/Equity Ratio 0.00
    Revenue/Share 7.72
    Earnings/Share 2.10
    Book Value/Share 6.16
    Dividend Rate 1.27
    Payout Ratio 35.00%
    IBM
    Sales 104.31 Bil
    Income 11.40 Bil
    Net Profit Margin 10.93%
    Return on Equity 50.65%
    Debt/Equity Ratio 1.21
    Revenue/Share 74.26
    Earnings/Share 8.11
    Book Value/Share 20.86
    Dividend Rate 2.00
    Payout Ratio 20.00%
    I think that a good management team should improve operating margins for EDS.

  5. Hi Fernando, Here are my thoughts about several of your questions:
    ————-
    Is the merger too late or too difficult?
    A large part of the strength of the industry leader, IBM, is its ability to provide the widest range of IT support services. With the merger, HP-EDS will be able to provide a very comprehensive set of services, and it may help them compete better against IBM and land more large contracts.
    The difficulty of integrating the companies will be high – their cultures and attitudes differ greatly. Another difficulty will be the fact that a large number of employees will likely be laid off to cut costs and reduce redundancies. Only time will tell if these difficulties will be too much or not.
    ————-
    Is off-shoring really working? Could the new company run against this strategy with software or devices instead of offshore workers?
    Off-shoring, while very complex and tough to manage, does typically reduce costs. If HP is able to be a first mover in automating many processes, they might be able to gain advantages over rivals by cutting complexity and by having less dispersed operations. However, the benefits from automation will likely not be significant for some time, as off-shoring is often still cheaper and more effective than creating custom automation applications. However, if HP is able to create reusable automation templates, they might be able to use this for an advantage in the future.
    ————
    How does the HP-EDS market-share compare to other big providers?
    Estimated IT services market (2007): $500-550B
    Several key providers:
    IBM 10%
    HP + EDS 7%
    Accenture 4%
    CSC 3%
    ————
    Gabriel

  6. Is it too late? Is it too difficult?
    A company doesn’t do Outsourcing just because they decide that it has to be done.
    There are many things to change to deliver a proper service: Service Management, HHRR, Operations, Processes, Comercial message, … And these are things that take a long time to change as it is to do with the way everybody in a company like HP works. By the way, how far are IBM or Accenture from the rest?. Isn’t it too late? Do they have a real and susteinable advantage? EDS and HP will have to run twice but with the body and skeleton of two companies. Hard times for the company I suppose. The only point is that message underlines regarding the automation, because it differs from the one related to offshoring (mainly the big activity where their rivals are involved). Is offshoring really working?
    Could the new company run against this strategy with software or devices instead of offshore workers?
    Fernando González Córdoba
    EMBAS09

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