FAQ: What does the HP-EDS deal really mean?

FAQ: What does the HP-EDS deal really mean?

HP and EDS joining forces could knock IBM out of the top spot in the services market

"EDS had a rough ride earlier in the decade when everything slowed down," Pring says. The company in 2003 brought in Chairman and CEO Michael Jordan to "right the ship" and he helped the vendor mend contracts with the US Navy. But Jordan in the last year has been passing duties onto Rittenmeyer, which hasn't reenergized the business as much as many had hoped.

"EDS has been losing out in big deals to competitors in its peer group, IBM in particular, and the company's share price has been lagging for the past six months," Pring says. But since talk of this acquisition began to spread, industry watchers say the prospect of HP buying EDS will please many EDS stockholders.

"Stockholders are looking at this deal as a good exit strategy for EDS. There is a lot of excitement around this," Pring says.

What will this deal mean to the IT services industry?

IT services providers will compete against a stronger number two vendor in the market, and IBM, specifically, will face off against HP more directly in another market.

Pring says the deal could also drive HP to invest and develop a stronger offshore workforce to enable the combined company to service multinational clients. EDS' offshore model is not as strong as IBM's and for IBM to truly consider HP a competitor, HP will have to quickly ramp up to better serve global customers.

"IBM is going to look at the scale of this deal and the potential integration headache and argue that it will be a good 18 to 24 months before HP is able to take advantage of the acquisition," Pring says.

As for the Indian offshore providers such as Tata Consultancy Services and Wipro Technologies, Pring says such vendors will continue to position themselves as an alternative to IBM Global Technology Services and now HP.

"This deal will only reinforce the Indian companies' portrayal of themselves as another option," Pring says. "This deal represents consolidation at the high end of the IT services market, and the Indian providers are increasing their presence in the US and Europe by positioning themselves as an alternative to these US companies."

What does HP have to do now to make this deal a success?

Despite having several large acquisitions under its belt -- Compaq noted as the largest -- HP will run into issues integrating the two companies.

"HP will say it knows how to do such large integration based on its Compaq experience. And they all say they don't, but companies do tend to take their eye off the ball when they are challenged to integrate companies and cultures with a deal of this size," Pring says.

For one, this is a sizeable IT services deal. It's considerably larger than IBM's US$3.5 billion acquisition of consulting firm PricewaterhouseCoopers in 2002, but of less monetary value than HP's US$23 billion Compaq buy.

"We have never seen anything of this scale in IT services," Pring says. "They will have to work hard to put the two organizational charts together in a meaningful way and really prove they have learned the secret sauce of big-deal acquisitions."

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