HP Closes Q308 Ready to Bring EDS Into the Fold

• Posted: Wednesday, August 27, 2008
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• Author: pradhana
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• Filed under: Business Analysis

By John Madden, Research Director at Ovum

Hewlett-Packard this week announced another solid quarter of earnings and that its acquisition of EDS will close by month end. HP CEO Mark Hurd, with his usual confidence, indicated he is prepared to apply HP's financial and execution discipline to EDS' cost and delivery structures. With an unsteady global economic picture generating concern about long-term IT investments, Hurd will need to do that and more in order to ensure that customers, suppliers, partners and shareholders see benefits from an HP-EDS combination.

In a conference call with analysts to discuss third-quarter results, Hurd mostly steered clear of substantial details related to EDS as the $13.9 billion deal winds its way through its final approvals (shareholders from both companies have signed off). However, he noted that a team of some 500 people are dedicated to planning the HP-EDS integration, and repeated his belief that “HP’s innovation” coupled with EDS' “scaled services business” will be a boon for customers.

Ultimately, Hurd said HP will help EDS automate processes and operate with a lower cost structure to be more competitive in the market. HP intends to meet with securities analysts on 15 September – with HP and EDS officials in attendance – to provide more details post-acquisition.

HP poised to be dominant force in infrastructure-related services with EDS

Even with ongoing global economic pressures, we continue to be upbeat but very cautious about the outcome of this deal. As we’ve said from the time this deal was announced in May, HP faces a laundry list of integration issues with EDS: financial, organizational, operational and cultural (and interestingly cultural issues may present some of the highest hurdles).

HP has already said it intends to merge the two companies’ outsourcing groups, which will clearly make HP an even more dominant force in infrastructure- and increasingly application-related services. While an economic slowdown may force customers to delay some IT investments, it can also open up new outsourcing avenues as customers turn to third parties to operate various aspects of their IT more efficiently. Lucky for HP, then, that it will soon have one of the world’s largest outsourcing operations under its roof in a few weeks.

Judging by HP’s recent past, and Hurd’s comments this week, it’s clear that HP is anxious to bring EDS’ cost structure into alignment with the greater HP organization – and undoubtedly job cuts will be coming somewhere. We’re curious how this alignment will affect the consulting groups from both organizations – specifically, whether HP will combine them into one larger organization, and how close this organization will reside to the outsourcing group.

We would suggest that the decisions on consulting will be some of HP’s most critical in the long-term. If one of HP’s goals is to provide a true customer alternative to the likes of IBM and Accenture, which use consulting as the door-opener to broader outsourcing agreements with clients, then HP will need its ‘new’ consulting to engage with top line-of-business leaders and to demonstrate its vertical market expertise.

Earnings send HP into post-EDS era with a strong foundation

HP couldn’t have asked for a better earnings report to precede the close of the EDS deal – and assure investors, shareholders and customers that its financial base is more than solid. In the just completed third quarter, net revenue was $2.7 billion, up 10% from a year ago (5% when adjusted for currency), with growth in all regional segments – including 4% growth in the Americas.

(By contrast, EDS reported a 6% dip in its Americas revenue for its most recent quarter.) Hurd said HP continues to benefit from its broad product and services portfolio and global presence; in fact, 68% of third-quarter revenue came from outside the US, and almost a quarter of that revenue came from Brazil, Russia, India and China.

In the context of the EDS deal, HP Services (HPS) delivered one of its stronger quarters in recent memory, particularly in consulting and outsourcing. Overall HPS reported $4.8 billion in revenue, a 14% year-on-year increase. Consulting & Integration (C&I) and Outsourcing grew 13% and 18% respectively, compared to last year, while Technology Services, thanks to an increase in product-attached support services, grew 13% from a year ago. /PR

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