Down To Business: HP-EDS A Strong Move, Even If It's Uninspiring

Is the merger another Compaq economies-of-scale play? HP should be so lucky.
Hewlett-Packard's $13.9 billion deal to buy EDS is either an opportunistic grab of a struggling IT services company or a watershed event in the continuum of cloud computing, depending on the pundit rendering the premerger verdict. Could it possibly be that both are the case? Or even neither, at least not to the extent that the pundits insist?

One common criticism of the deal is the assertion that all big IT mergers fail. Rolled out as Exhibit A is HP's $19 billion acquisition of Compaq, a deal driven by former CEO Carly Fiorina. Why would HP make this same mistake twice? Apparently, the critics haven't been following HP's recent financial reports. Its acquisition of the PC and server maker in 2002 has proved to be a success by most any measure, even if it wasn't an immediate hit with analysts, shareholders, and customers.

In its preliminary second-quarter results, released the same day the EDS deal was announced, HP raised its revenue and earnings estimates (yet again) for the full year. While the preliminary report didn't drill down into specific business unit numbers, HP's first-quarter results show that operating profit from its Personal Systems Group rose a whopping 52% year over year, on 24% higher revenue, while profit from the Enterprise Storage and Servers unit increased 49% on 9% higher revenue. HP last quarter increased its lead over Dell in worldwide PC shipments, and it's No. 2 in the worldwide server market, gaining on IBM. So much for the Compaq deal being a shortsighted boondoggle.

Even if the EDS acquisition is mostly an old-school economies-of-scale play, a deal aimed at squeezing out more profits from the companies' combined $38 billion IT services businesses (compared with $54 billion for No. 1 player IBM) through consolidation and cost cuts, so what? CEO Mark Hurd, a results guy if there ever was one, is unapologetic. "We know a lot about how to look at overhead and how to look at costs that result from overhead," Hurd said in a conference call last week. "So think of us trying very hard to run the playbook that we think we know how to run very well."

There's indeed a lot of redundancy. EDS's services strengths, like HP's, are in infrastructure outsourcing, including data center and networking services, and both companies are moving more aggressively into business process outsourcing (areas like health claims and financial processing), application development, and consulting. But expect HP to leverage EDS's more extensive Rolodex in the financial services, energy, health care, and government sectors. HP CTO Shane Robison refers to the deal as a "reverse merger," with EDS taking the lead from its Plano, Texas, headquarters in assimilating the two services organizations.

EDS owns some 100 data centers worldwide, positioning HP alongside the likes of IBM, Google, and, increasingly, Microsoft, which are building out their facilities as hardware and software services start to move from customers' IT shops to the so-called Internet cloud. Part of HP's strategy is to host and manage those IT resources and guarantee service levels, though should cloud computing take hold as envisioned, there will be less of a need for its large-scale system integration services.

Regardless, IT's migration to the cloud won't happen overnight; there's still plenty of headroom in conventional infrastructure management, system integration, and outsourcing. Meantime, expect HP to consolidate its newly acquired data centers into a relative handful of spanking new facilities. CIO Randy Mott already is reducing HP's 86 data centers worldwide to six, including at least one in EDS's home state of Texas.

Is HP's acquisition of EDS visionary, game-changing, or any of the other hard-charging buzzwords of the day? Probably not. But it's a solid move and gives HP lots more options as the cloud computing model evolves. As with any big merger, HP and EDS customers must be wary of distractions and the loss of some key people. But don't write off HP's ability to execute over the long haul.

Rob Preston,
VP and Editor in Chief
[email protected]

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