HP Confirms EDS Acquisition

• Posted: Wednesday, May 14, 2008
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• Author: pradhana
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• Filed under: Business Analysis, Merger-Acquisition

By Phil Codling, Ovum principal analyst

Firstly, hats off to HP and EDS for their speedy action to confirm the deal. Rather than weeks of leaks, rumour and counter-rumour we've had an initial announcement and a confirmation of the intended takeover within 24 hours.

We also note that the initial financial investment involved for HP is not that significant in the scheme of things - it's less than the firm has spent on share buybacks during the last two years. The stakes are actually much higher than $13.9bn because if it gets the integration of EDS wrong, HP could potentially pay a much greater price. Get it right and the gain is much greater too.

“While regulatory hurdles are jumped and shareholder approval is sought (neither process should pose any problems), HP and EDS can now get on with the mammoth task of planning the merger of their businesses. In calls and briefings from representatives of both companies yesterday, some detail emerged around how this will proceed.”

HP says it intends to run EDS as 'EDS - an HP company', still headquartered in Plano, Texas, and still run by CEO Ron Rittenmeyer. As a first act of integration between the two companies' services operations, HP's outsourcing interests will be merged into EDS. That means that HP's consulting and integration teams (in its 'C&I' unit) will remain separate, at least initially, from those of EDS.

This decision reflects HP's product-centric view of the world. For the good of the services operation, we feel the C&I skills need to be both pooled and close to the outsourcing operation. So we would expect them ultimately to transition across to EDS as well, or to form a larger C&I operation with similar parts of EDS, although clearly this will need to be done without losing the connection with HP's hardware and software divisions.”

Job cuts are of course inevitable. Both CEOs have trimmed their workforces in more expensive locations (primarily North America and Europe) in order to become more efficient. The integration process will enable a fresh round of trimming to take place - indeed it will have to if Mark Hurd is to prove the long-term benefits of the deal to HP shareholders and, ultimately, keep his job. Meanwhile, trimming of data centres and offices will also be high on the agenda. Again, both companies are already in the process of rationalising such cost items, and will now need to enter into a whole new tranche of consolidation.

We've also taken calls from some customers of the two companies, and it's clear that there is an understandable level of concern out there. Our advice is that neither HP nor EDS is about to let service levels drop in the short-term - both businesses have the discipline to make sure that doesn't happen in our view (something you perhaps couldn't have said five years ago). Our concerns would be for the longer-term, as organisational changes kick in, morale potentially shifts and better-performing people in both companies decide where their future lies. As we said yesterday, HP must make sure it motivates and retains such people.

Moreover, customers would be justified in asking HP and EDS how they can expect to gain in the longer-term from the merger of the two companies, even though concrete plans are few at this stage. Meanwhile, no doubt HP will be hard at work coming up with answers for those (many) CIOs who happen to buy from both companies and will now be looking for quick gains from contract consolidation and/or renegotiation.”/PR

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