HP seals EDS deal; Services No. 2 behind IBM; Can Hurd run EDS better?

HP seals EDS deal; Services No. 2 behind IBM; Can Hurd run EDS better?

Summary: Updated: Hewlett-Packard CEO Mark Hurd said Tuesday he plans to use a familiar playbook to integrate Electronic Data Systems: Leverage scale, squeeze costs -- and underpromise and overdeliver."We're running the playbook we know how to run very well," said Hurd, on a conference call with analysts.

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Updated: Hewlett-Packard CEO Mark Hurd said Tuesday he plans to use a familiar playbook to integrate Electronic Data Systems: Leverage scale, squeeze costs -- and underpromise and overdeliver.

"We're running the playbook we know how to run very well," said Hurd, on a conference call with analysts. "We know how to get significant leverage out of our scale. We spent double-digit thousands of hours on the due diligence and planning. This thing (EDS) is very attractive. We didn't bake in a lot of revenue synergies, but they are there."

On Tuesday, HP officially announced that it is buying Electronic Data eds2.pngSystems for $25 a share, or about $12.8 billion (Techmeme). HP put an enterprise value of $13.9 billion on the deal, which will more than double HP's services revenue.

Hurd's bet: That he can run EDS--a company that has had flattish revenue growth since 2000--better. When questioned about EDS execution, Hurd noted that the company had done a lot of heavy lifting on its long-term restructuring. "If we do get the cost synergies done--and we will--we think this thing has tremendous opportunity," said Hurd, who indicated that HP will get its synergies and deliver revenue growth with EDS.

Overall, Wall Street analysts were skeptical about the EDS purchase. What was truly stunning is that analysts weren't budging from their skepticism given that Hurd is a Wall Street favorite. Analysts asked Hurd why HP didn't acquire a smaller offshore player.

Among the EDS deal details:

  • The deal is expected to close in the second half of 2008.
  • HP will create a new business group called EDS, an HP company. EDS will remain in Plano, Texas and be lead by current EDS CEO Ronald Rittenmeyer, who will report to Mark Hurd.
  • HP will be the second largest IT services provider.
  • HP said the transaction will be accretive to fiscal 2009 non-GAAP earnings and accretive to 2010 GAAP earnings. "Significant synergies are expected as a result of the combination," the company said.
  • HP will pay for EDS with cash and new debt.

Also see: HP’s bid for EDS: Opportunity costs loom

"We will be a strong business partner," said Hurd, who on a conference call said the deal is important strategically and financially. Hurd also said he was confident that HP could execute on the integration of EDS and deliver savings and efficiencies.

HP and EDS executives played up the complementary nature of the two businesses (click for full slide):

eds1.png

Other key points from the conference call:

  • Opsware will play a big role automating EDS and HP operations. EDS had been Opsware's biggest customer.
  • Rittenmeyer said the deal will push EDS' zero outage initiative to a "new level".
  • There is very little overlap between the two companies, said Hurd.
  • "EDS had a strong applications outsourcing business and frankly we didn't," said Hurd.
  • Analysts were skeptical about HP's opportunity costs related to the EDS deal.
  • Analysts questioned the value of EDS and noted that many of its employees were based in the U.S. Rittenmeyer challenged that assessment and noted that many EDS customers are in federal, state and local government and can't use offshore resources.
  • HP didn't discuss layoffs after the EDS deal, but Hurd said operating profits could be improved. That's a hint that there may be some workforce restructuring ahead.

To allay any concerns about the EDS deal, HP upped its second quarter outlook and fiscal 2008 guidance (statement). The company said second quarter earnings were 80 cents a share and 87 cents excluding items. Revenue for the second quarter was $28.3 billion, up from $25.5 billion a year ago. Wall Street was expecting earnings of 84 cents a share, according to Thomson Financial.

For the third quarter, HP projected revenue between $27.3 billion and $27.4 billion with non-GAAP earnings between 82 cents a share and 83 cents a share. GAAP earnings will be 76 cents a share to 77 cents a share. Wall Street was expecting third quarter earnings of 82 cents a share.

HP projected fiscal 2008 revenue between $114.2 billion and $114.4 billion with earnings of $3.30 to $3.34, up from its previous range of $3.26 a share to $3.30. Non-GAAP earnings are projected to be $3.54 a share to $3.58, up from its $3.50 to $3.54 range. Wall Street was expecting $3.52 a share.

While EDS boosts HP's services business dramatically, the company still has some holes to fill. This chart tells the tale:

eds3.png

Next up for HP may be a few business process outsourcing acquisitions.

Topics: Banking, Hewlett-Packard

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23 comments
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  • Should have bought AMD first.

    They could have obtained EDS at a later date, then filled it with cheap AMD products. AMD is a steal right now! EDS is currently filled with IBM products.
    yarr
    • Yes to AMD purchase

      If you want to compete with IBM, AMD is the way to go.
      kmguru
      • AMD too closely tied to IBM, HP to Intel

        AMD can't afford R&D anymore, so they pay IBM to share chip technology. HP is tied to Intel, since they are the only user and supporter of Itanic.

        The sad fact is that no PC or server vendor can afford to p1ss off Intel and/or Microsoft, not even HP or IBM.
        terry flores
  • RE: HP seals EDS deal; Services No. 2 behind IBM; Hurd touts efficiencies

    HP have also closely partnered and tied up some big deals with BT Global Services (Anglo American) so they are clearly going after IBM GS aggressively in the converged service delivery sector

    Obviously Services > Hardware in terms of $$$
    JoeShmoe99
  • RE: HP seals EDS deal; Services No. 2 behind IBM; Hurd touts efficiencies

    This is going to end badly. Services companies really aren't efficient in the IT industry.
    Loverock Davidson
  • Wow... HP ran itself into the ground, now EDS?

    Wow... this is a shocker. Not that companies buy other companies when they run out of other ideas, but... Goodbye EDS. HP ran itself in the ground, and ran Compaq into the ground. HP is mainly known now for the cheap junk low-end equipment at Wal-Mart you wouldn't buy, and overpriced printer ink, when it used to be a tech leader and one of the best companies. My guess is EDS is not going to bring out the best in HP, but that HP is going to run EDS into the ground. Sad.
    scott1329
    • Time will tell

      But HP's track record for merging with/buying other companies is not great.

      It is very difficult job to do and the cultures of EDS and HP are so different, Mark Hurd has his work cut out for him.
      r_rosen
    • no loss

      I certainly will not shed a tear for them. I have much more respect for HP, even though I've never worked for them (not that they're without fault). I was subcontracting for Compaq several years before the HP purchase and I felt they were making far too many missteps at that time and the end was inevitable. I was surprised they lasted as long as they did - I just didn't feel they were competitive with Dell. It doesn't surprise me that they languished under HP - HP and Compaq had primarily retail models with hundreds of days of inventory - not an easy way to compete against a smaller, more nimble competitor with a much faster turnaround. Both were using motherboards I considered inferior at the time and Dell wasn't (but Dell eventually joined them, as I recall - I am specifically referring to ECS and Microstar [MSI], but I know at least MSI has improved significantly in quality since then).

      I had the misfortune of working for EDS after the 2001 crash and felt they mishandled almost everything they did, first diversifying, then contracting and usually just floating above junk status. In the meantime, they offered the worst benefit package of any company I've worked for before or since and laid off some of the best programmers I've ever known. When they spun off UGS, they effectively terminated (fired) every employee, which looks bad on employment records. I have nothing good to say about them - bar none the worst company I ever worked for and good riddance.
      Clewin
      • What about SDRC?

        what did EDS do with SDRC? Systems Dynamics Research Corp. in Cincinnati, OH?
        jonsaint@...
    • Hey EDS - watch your backs

      When Mark Hurd was chairman of NCR, he made them "profitable" by selling assets and offering "voluntary" early retirements (retire now or you will be fired). Half of the EDS employees will be gone this time next year.
      jimrhenow@...
  • RE: HP seals EDS deal; Services No. 2 behind IBM; Hurd touts efficiencies

    Gr8..HP becoming Second Largest IT Service Provider
    sandipkharde
  • RE: HP seals EDS deal; Services No. 2 behind IBM; Hurd touts efficiencies

    > There is very little overlap between the two companies, said Hurd.

    So, where exactly are these cost savings going to come from? My understanding is that EDS has already been pretty aggressive in terms of cost-cutting in recent years. What's left to squeeze out of that stone?
    fyao
    • Doesn't reducing service employees = reducing revenue?

      If you reduce the number of mechanics in an auto shop, you make less money every day, assuming that they all have something to work on.

      So how will reducing services employees at EDS and HP increase revenues and profits? EDS/HP will charge more for less?? That doesn't make sense, given the mediocre customer sat ratings of both companies.

      Personally I think that HP is paying way too much money for what EDS is actually worth. It will end up being a very costly business for them to be in unless they change their entire services and consulting strategy to go for the top-dollar high-value projects like SAP and BPO that are multi-year gigs.
      terry flores
  • HP...Service... LOL... Yeah Right

    HP doesn't have a clue was service is let alone customer satisfaction... The "HP Way" has proven itself to be a way of shooting yourself in the foot.
    i8thecat
  • RE: HP seals EDS deal; Services No. 2 behind IBM; Hurd touts efficiencies

    If you want to see a better model, look at the results of HP's Middle East & Eastern Europe operations and acquisitions, they are extremely strong in both areas (#1, ahead of IBM). This may not look great in private sector, but public sector US and high growth EMEA and PacRim ... the world is a much smaller place than it seems. Yes HP has a less than stellar reputation in Detroit's client base, but so what?
    Daemeon.Reiydelle@...
  • RE: HP seals EDS deal; Services No. 2 behind IBM; Hurd touts efficiencies

    I think if you look at this historically it makes a lot of sense. Carly received $115,000,000 for acquiring Compaq. Mike Hurd will receive some obscene amount for acquiring EDS. End of story. He walks away rich. That is the whole point and what history tells us will happen. The measure of success is once again how much the CEO gets NOT the actual business outcome.
    Art Royce
  • RE: HP seals EDS deal; Services No. 2 behind IBM; Hurd touts efficiencies

    Interesting that Mark Hurd came in to replace Carly after all the cririsism after the Compaq buy up.

    Mark didn't change any thing that Carly had set up, but now he's bought EDS and Wall St. is viewing this one pretty similarly to their views on the Compaq deal.

    Maybe Mark is next to be knifed in the back by the HP board ?
    HooNose
  • RE: HP seals EDS deal; Services No. 2 behind IBM; Hurd touts efficiencies

    Another one bites the dust! HP and IBM take overs are all to common now. They come in and take over and send the work overseas to Brazil; Costa Rica; India and other countries like that. If postions aren't lost to overseas they bring 'em in from overseas. In the Northern Calif. region, companies like The Gap; HealthNet; Chevron and now EDS (there's a couple of Data Centers here)all have been affected.
    Who's next?
    rcox@...
    • Wise up ...

      If IBM and HP weren't sending jobs overseas, it would just be someone else. CIO's are just interested in one thing now: bottom-dollar price. They don't care about service to their own users, service to customers, and least of all employee's well-being. They would be perfectly fine with everybody wearing a dog collar and working for table scraps because it would mean big stock options to them.

      Right or wrong, IT is not considered a value enhancer by most corporations. It is just another necessary evil, like having telephones and parking lots. American IT professionals are considered to be insufferable prima donnas who do nothing but cause problems for management and make outrageous demands.

      If you are a person with generic IT skills, then your time is about up. If you don't possess some other valuable knowledge (business process, negotiation skill, etc.) then you will either be on a part-time no-benefits contract, or on the unemployment line.
      terry flores
  • Hurd's master stroke

    Hurd has played a master stroke. In one shot he is competing
    for US government services business. It will be a channel to
    place HP hw systems. He now also has a channel to reduce
    costs by taking talent from offshore operations in less
    expensive newly groomed teams HP has built in Asia, just like
    IBM, Oracle, and MicroSoft.
    HP-EDS will compete with IBM systems, exceed in printing.
    HP will also match or beat Oracle and MircoSoft in more
    deals. Rajeev Rawat.
    rr@...