Tuesday, May 13, 2008

Hewlett-Packard (HP), a global technology leader with major businesses operations in computer hardware, software, printing and services announced today that they will acquire Electronic Data Systems (EDS) for US$13.9 billion in an all cash deal. The Wall Street Journal has reported that the deal has been in various stages of development since October 2007 when the CEO of EDS, Ron Rittenmeyer, approached HP CEO Mark Hurd with a proposition to join forces.

This acquisition models a strong pattern of robust mergers and acquisitions activity since the arrival of current CEO Mr. Hurd. Since his arrival in 2005, HP has worked to expand their overall IT portfolio through organic research and development growth and the purchase of “best of breed” companies such as Mercury, Opsware and Peregrine.

This purchase will bolster the services arm of HP placing the company in second place worldwide behind IBM in terms of IT services. The added revenue will work to double Hewlett-Packard’s sales from services to almost $40 billion, about as much as it gets from PCs. The combined forces of EDS and HP will represent a total worldwide workforce of 309,000 people in more than 80 countries representing 7% of the worldwide IT Service market.

In 2006 HP surpassed IBM as the largest technology company in the world in terms of overall revenue and since that time the two industry titans have fiercely battled for market dominance. Analysts at Briefing.com said: “Adding EDS would expand HP’s service offering and also increase its market share in the industry, helping it better compete with industry heavyweight IBM.”

We wouldn’t do the deal if we didn’t think we had an opportunity to improve the operating profit level that EDS currently has.

Like any deal of this size it is not without its optimists and pessimists. From the positive side American Technology Research analyst Shaw Wu said. “I am not saying this deal is a slam dunk by any means, but people have underestimated Mark Hurd before.”

“EDS is more mature and more sophisticated in many of the processes that they bring to market than where we are”, Hurd, 51, told analysts on a conference call yesterday. “We wouldn’t do the deal if we didn’t think we had an opportunity to improve the operating profit level that EDS currently has.”

A deal of this size provides a lot of potential for HP but it could also bring a lot of heartache for competitors other than IBM. For years, both Dell and Sun Microsystems have enjoyed preferred alliances with EDS selling expensive high-end servers to EDS customers. Xerox has also benefited by selling its printers and copiers through EDS, which is the most lucrative part of HP’s business.

Dell in particular could be hurt the most. In recent years its PC business has lagged with declining sales and lost market share. Most of this market share was lost directly to HP. This buyout could deliver another major blow as last year; its sales to businesses were almost five times the revenue it received from consumers. With a major Dell partner now part of the competition that alliance will certainly be in question.