HP, EDS success depends on execution, experts say

A Hewlett-Packard and EDS merge sounds great on paper, but analysts say its success will all depend on how well the plan is executed.

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Hewlett-Packard Co. (HP) said today that it will buy Electronic Data Systems Corp. (EDS) for approximately $13.9 billion, or $25 per share. The transaction more than doubles HP's IT services revenue of $16.6 billion in fiscal 2007 to $38 billion. The deal, HP's largest since it acquired rival Compaq for $20 billion in 2002, will make the Palo Alto, Calif.-based personal computer and printer maker the No. 2 player in IT services, behind...

IBM. The deal is expected to close in the second half of 2008.

HP said Tuesday that it will form a new business group, to be called EDS -- an HP company. The group will be headquartered at EDS's existing executive offices in Plano, Texas, and led by EDS chairman, president and CEO Ronald A. Rittenmeyer. Rittenmeyer will become a member of the executive council and report to Mark Hurd, HP's chairman and CEO. The combined companies will have 210,000 employees, doing business in more than 80 countries.

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HP expects "significant synergies" from the combination, Hurd said in a conference call to reporters Tuesday, stating that the deal fulfills HP's stated objective to bolster its services businesses and makes the company more competitive globally, particularly in Europe and the Americas. Hurd rattled off a long list of the specific service offerings that would be delivered by the combined companies, including data center services, networking services and managed security, business process outsourcing, customer relationship management and human resources outsourcing, and technology services.

"Together, we will be a stronger business partner, delivering customers the broadest, most competitive portfolio of products and services in the industry. This reinforces our commitment to help customers manage and transform their technology to achieve better results," Hurd said.

Whether the deal gives HP the leg up it wants in the $748 billion IT services market was a topic of some debate Monday, when news first surfaced that a deal was in the works. Reaction to the news was mixed on Wall Street Monday. HP shares were down nearly 5% to $46.83 at yesterday's close, while EDS shares rose 28% to close at $24.13.

The analyst ranks also expressed doubts.

"On paper an HP-EDS combination looks workable. But in practice it could prove anything but," said Phil Codling, John Madden and Tom Kucharvy, analysts at Ovum, a global advisory and consulting firm, in a statement this morning.

Much will depend on how well HP executes on what will be a "massive integration" program, the Ovum analysts said. HP's integration challenges, as well as its successes with the Compaq merger, were overshadowed by "the blistering investor and management fight that preceded it," so it is difficult to comment on how an HP-EDS integration might proceed, they said. "But it would inevitably entail risks," they said, given the complexity of combining services portfolios and delivery platforms to maximize the economies of scale to make the deal work.

Forrester Research Inc. analyst Christine Ferrusi Ross, said "leg up is too strong a word" for a company which has lacked a "clear vision for IT services."

"The vision changes every 12 months, and I say this as an analyst who's been covering this field since 1994," Ferrusi Ross said.

The deal should give HP the discipline to move forward in a "single direction" on its quest to provide services, she said.

"Obviously, there will be changes."
Ronald A. Rittenmeyer
chairman, president and CEOEDS

For CIOs whose companies are existing clients of HP or EDS, she doesn't see huge implications up front. "Your account team is your account team. It is probably going to remain fairly stable." But for companies that were using both EDS and HP to wring the cost advantages of not being single-sourced, CIOs might want to think about whether they need to expand their provider list.

If you are a CIO at a large company with mega-outsourcing contracts, the HP deal doesn't change the lineup of the big players -- EDS, Computer Sciences Corp. and IBM. One interesting wrinkle: EDS is a reseller of Sun Microsystems Inc. products, as well as others. If you are a big Sun shop, Ferrusi Ross said you will have to consider whether EDS can give you a discount on HP products.

Retaining talented people will also prove key to getting the most out of this merger, the Ovum team said, adding that Hurd would need to move quickly to stem any potential "brain drain" from EDS.

The deal will almost certainly result in some job cuts. EDS's Rittenmeyer said he was "absolutely delighted" that EDS is joining forces with HP, referring to the deal as "a natural evolution" in EDS's objective to supply "a comprehensive set of services at the right value," and hailing the acquisition as a "great deal" for EDS shareholders, customers and for EDs employees.

When asked, however, if the deal would result in layoffs, Rittenmeyer did not rule out job cuts, stating that EDS is "continuing to streamline "its workforce and has been for some time. "Obviously, there will be changes," Rittenmeyer said, adding that automation makes quality and service better for the client.

Ben Pring, a research vice president in the IT Practices Group at Gartner Group Inc., also pointed to challenges ahead, telling The New York Times yesterday that the deal joins "two large businesses with two different heritages. It's going to be a big culture clash," he said, adding that "people who are skeptical of big integrations will have a field day around this."

Let us know what you think about the story; email: Linda Tucci, Senior News Writer

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