HP's to-do list following EDS acquisition

We now know that HP is acquiring EDS in what appears to be an agreed bid that values EDS at $13.9 billion.
Written by Dennis Howlett, Contributor
We now know that HP is acquiring EDS in what appears to be an agreed bid that values EDS at $13.9 billion. Larry Dignan has the main analysis but it leaves open a series of testing questions for HP CEO Mark Hurd. As Larry points out:
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.
On the media call, Hurd was asked why the company hadn't considered a mega merger with Accenture, which would have given it a huge BPO and software boost rather than consolidating what many see as yesterday's infrastructure style play. Another questioner probed HP's position on acquisitions in India. Hurd's response to both questions was the same: "We apply a simple filter in these things...and we just felt that it made a lot of sense financially, strategically and we feel good about the progress EDS has been making." In other words, HP believes it can not only recoup the buying price but restore its current $10 billion cash position within 4-6 quarters of closing the deal. At least that's what Cathie Lesjak, HP Executive Vice President and Chief Financial Officer said on the call. That can only mean one thing - a lot of blood on the floor, the strongest hint coming from Hurd when he alluded to the overhead EDS incurs in selling its services. But that still leaves a number of questions: Despite Hurd's confidence, aggressive cost cutting almost always comes at a price in the loss of some of the best management talent and business continuity. While Ronald Rittenmeyer, EDS current CEO remains in post, he will be the man required to accelerate cost reductions and hand out the pink slips, albeit reporting to Hurd. While Rittenmeyer is adjudged to have done a decent job, it will fall to Hurd to ensure laser like precision in execution. This is never easy in such a large merger. EDS pipeline is said to be in great shape but the company can be sure that customers will look to see what they can drive out of price if they see EDS slashing costs. Therefore, margin improvement is far from a done deal. Most analysts believe there is very little growth opportunity in this deal given the composition of the combined assets. Cost cutting only delivers a one hit wonder on the bottom line. So despite Hurd's record on execution, Wall Street could well put HP under pressure to show how it will achieve growth. Acquiring EDS gives HP a $3.1 billion BPO business, but that's miniscule when compared to the global market which is still growing and certainly outstripping the infrastructure work for which EDS is better known. On the software side, HP is relatively weak and has nothing like the breadth and depth of offerings that IBM can deploy. Like any good CEO looking to digest big acquisition meal, Hurd won't commit to the future but if it is to effectively compete on the global stage as a full service provider against IBM then further acquisitions are mandatory in both BPO and software. What size and shape those might take is anyone's guess but given the planned synergies, Hurd must be confident that other good sized targets will emerge. As I said at the top of this piece, Mark Hurd's track record speaks for itself. But he's now playing with a huge basket of assets that while holding potential to deliver profit, leave the company exposed on crucial fronts. The first test comes when the first swathe of layoffs are announced. UPDATE: Colleague Jeff Nolan adds a fresh dimension asserting:

...this is a good move because of EDS’ outsourcing business providing a growth opportunity not just for services but also hardware, HP’s core business. These businesses require extreme scale in order for the economics to work and as a consequence the server hardware market is contracting and expanding at the same time. With companies increasingly moving to hosted data centers and on-demand applications, not too mention hosted cloud initiatives, there are fewer but bigger hardware purchasers.

Lastly, HP definitely needs to get in the game with a cloud initiative and while EDS doesn’t explicitly have that asset today it is not a stretch to give them the benefit of the doubt for their ability to get in this game given the right prioritization.

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