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HP to take out EDS: does it make sense?

We've heard these rumors before but this time it seems HP is in serious hunting mode with EDS as the target. Larry Dignan offers his take on the rationale behind the story.
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Written by Dennis Howlett on

We've heard these rumors before but this time it seems HP is in serious hunting mode with EDS as the target. Larry Dignan offers his take on the rationale behind the story. Fellow Irregular Vinnie Mirchandani adds to the debate suggesting both pluses and minuses:

HP could use a better services arm - while it has some marquee clients like P&G, it is inconsistent in most outsourcing deals. EDS could use a layer of cover. The company which just about defined outsourcing has been running hard to stay even - flat growth over the last decade. So, at a macro level the potential combination announced today makes sense...

...But EDS is not Accenture or PwC (which IBM acquired) or TCS or Infosys. Its major strength is still in infrastructure outsourcing (though it has been growing its application and BPO capabilities nicely). HP's outsourcing is similarly more skewed towards infrastructure. So, it is a scale play. But the timing is risky because infrastructure outsourcing is being challenged by data center consolidations, a secular decline in processing, storage and network charges and emergence of utility and cloud computing models. Not the world either EDS or HP grew up in.

Tom Foremski's take is different again:

  • - HP CEO Mark Hurd is seeking to capitalize on HP's renewed momentum and take on rival IBM by beefing up IT services.
  • - EDS has a solid IT services business with a lot of government contracts that could help balance out a possible recession in other industry sectors.
  • - There might seem to be a large cultural difference between the two companies but Compaq, which HP acquired in 2002, was headquartered in Texas.
  • - HP would still need to gain a high-end IT consultancy business in order to compete with IBM.
  • - Another area that HP still needs to address is in its middleware software business.
  • - The timing is quite good. It is best to try and complete such a large acquisition and integration during times of economic slowdown so that the combined entity is firing on all cylinders when boom times come around again.

My take is skewed by experiences I've seen in Europe where EDS has been removed or had its contractual relationships significantly cut back as projects have either failed, been 'botched' or it's been forced to bid under onerous conditions. While everyone points to flat growth, contract cutbacks and changes in the infrastructure world, the long term problems in some of these massive contracts have made EDS a relatively easy target.

Assuming HP consummates this rumored marriage, it's a no brainer that Mark Hurd, HP's CEO will apply the business equivalent of deep liposuction to EDS management. How well HP digests such a large acquisition remains to be seen though the culture gap may not be quite as tough to work through as Tom suggests. HP already has a decent complement of EDS'ers.

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