HP-EDS will 'shake up' services market

Potential merger with EDS will prove beneficial, but difficult for HP, which may face huge challenges in the "ambitious corporate integration", say Ovum analysts.

In a move that could potentially jolt the IT services industry, a merger between Hewlett-Packard and EDS might seem workable on paper but could prove otherwise in practice, according to research firm Ovum.

HP and EDS recently issued separate statements confirming they are currently in "advanced talks" on a possible merger, which some source have estimated to be worth US$12 billion to US$13 billion.

On paper an HP-EDS combination looks workable. But, in practice, it could prove anything but."

If successful, a union between the two companies could offer significant benefits to HP, extending the IT giant's market reach and clientele, Ovum analysts Phil Codling, John Madden and Tom Kucharvy, said in a statement released Tuesday.

"Here comes a possible very big play indeed, big not just for HP and EDS, but also in terms of its potential to shake up the entrenched competitive landscape in global IT services," the analysts said.

While HP has been able to handle large-scale global outsourcing contracts, the Ovum analysts noted that the company has "nowhere near" the reach and customer base of EDS in some sectors and markets, particularly government contracts.

A merger would see EDS bringing depth and experience to HP's IT outsourcing business, and open up new avenues for HP to peddle its portfolio of software and systems management products.

With US$22.1 billion revenues generated last year, EDS would also more than double the size of HP's service business, currently worth US$16.6 billion.

While the resulting US$39 billion services operation would still be smaller than IBM's global services business, which generated US$54 billion in revenues, a merger would narrow the gap significantly and put HP-EDS as a "clear No. 2 in IT services".

"What HP-EDS would still lack, however, is a business-oriented consulting capability that comes close to rivaling those of IBM or Accenture," the Ovum analysts said. "In other words, EDS helps HP rise 'up the stack' in IT services a little, especially in the applications domain, but there are still plenty of attractive engagements from which it might be excluded, not to mention the sales opportunities that business consulting can generate for an IT services firm."

"All of this assumes that, if the deal goes through, HP succeeds with a massive integration program."

In fact, the analysts cautioned that a merger of this size inevitably carries certain risks, and pointed to HP's experience from the mammoth integration with its 2002 merger with Compaq.

HP would face a huge task combining both companies' service portfolios and delivery platforms to maximize economies of scale. In addition, the IT vendor would have to move swiftly to plug any potential brain drain resulting from an exodus of EDS employees.

"Ultimately, whether [competitors] IBM, Accenture, CSC and CapGemini, need fear the outcome of this potential deal would rest on the success or otherwise of what would undoubtedly be a very ambitious corporate integration project," the Ovum analysts said.

"On paper an HP-EDS combination looks workable. But, in practice, it could prove anything but."


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