Hewlett-Packard bids for EDS to take on IBM in services

An HP acquisition of EDS could push HP's services unit up to number two in the IT industry, right behind IBM. Whether partners will benefit is yet to be seen.

Hewlett-Packard Co. (HP) wants to buy Electronic Data Systems Corp. (EDS) for $12.6 billion in cash.

If the HP acquisition of EDS passes regulatory and shareholder muster, it could spawn an IT services giant with enough might to take on IBM Global Technology Services (GTS) -- a longtime goal of HP's.

Combined, HP's services unit and EDS would earn about $40 billion in revenue annually. In 2007, HP's business unit reported $16.6 billion in revenue, while EDS reported $22.1 billion. IBM's GTS unit reported $36 billion.

The deal, which HP confirmed early Tuesday, should close in the second half of 2008. The HP acquisition of EDS is valued at about $25 per share, a 30% premium from where the stock was trading before news of the proposed buyout leaked.

Initial partner and analyst reaction was positive, although the largest systems integrators (SIs) -- most of which have relationships with HP -- could view the newly huge HP services group as a threat.

"Overall this makes HP stronger versus IBM, and that's good for us," said George Brown, CEO of Database Solutions Inc., a King of Prussia, Penn.-based HP partner.

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Brown doesn't foresee potential channel conflict between existing HP reseller partners and incoming EDS players.

"We resell HP servers and hardware and are not in the managed service business, so I don't see a problem," Brown said. "EDS, with its data center design and management expertise, will help HP play more and more in cloud-based computing," he added.

HP acquisition of EDS could upset enterprise services, managed services ecosystem

Partners in the managed services arena and enterprise integrators may well feel differently about an HP acquisition of EDS, however.

It will be interesting to watch the acquisition play out, especially as vendors urge an increasing number of hardware resellers to become managed services providers or consultants, in order to extend revenue streams in tough economic times when product sales are down. While EDS could pose a threat, it could also offer partners a hand in crucial business services that HP is lacking but IBM has. The good news is that HP has recently leaned heavily in favor of supporting solution providers, announcing last month it would move 750 direct maintenance contracts over to partners.

Analysts are looking to EDS to bring HP a stronger approach in IT integration and infrastructure outsourcing. As for business systems integration services, IDC analyst Patrick Levy said HP could benefit from EDS specifically in some geographic areas.

"HP is strong in Europe and Asia, and EDS is strong in the U.S., especially with government clients," Levy said, calling the deal the "birth of a major player" that will be "almost as big as IBM in services."

This is not the first time HP has attempted to buy its way into a stronger business services presence. In 2000, under former CEO Carly Fiorina, the company attempted to acquire PricewaterhouseCoopers Consulting (PWC), but failed. IBM ended up buying PWC a few years later for less than HP was offering. That acquisition gave IBM a business intelligence (BI) arm that extended far beyond technology.

Since 2000, HP has made a couple of small acquisitions, like that of BI company Knightsbridge Solutions in 2006, but none has been as monumental a push as this. But while EDS with its 136,000 employees worldwide has a strong technology services business, it is not likely to bring the same kind of full portfolio PWC brought IBM.

As for shakeout in the IT solution provider market as a whole, Levy said this deal is an indication of more acquisitions of midsized and large business services and technology integration companies to come. In a commoditized market in which it is harder to make margins, consolidation is inevitable, he said. The EDS acquisition may be a sign that it will happen more speedily than expected. Levy speculated that companies like BearingPoint could be up next for acquisition. BearingPoint's offerings range from managed services and infrastructure integration to security, compliance and so-called human capital.

Senior news editor Barbara Darrow contributed to this report.

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