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HP won a breather yesterday in its long fight to rival IBM by snapping up EDS, the leading government IT contractor, in a deal worth more than $13billion (£6.6bn). It represents the biggest deal acquisition for the printers giant since it bought Compaq in 2002 for $19bn, and is triple the value HP paid for software firm Mercury in 2006. Unlike the software sphere, analysts pointed out that recently the top ten IT services players have barely changed place, let alone ownership, despite rumour and interest. But the HP/EDS tie-up is a big move – “not just for HP and EDS, but also in terms of its potential to shake up the entrenched competitive landscape in global IT services.” This verdict, from Ovum, stems from HP’s estimate that the $13.9bn deal will more than double its revenues from IT services, one of the most lucrative technology markets. This is significant: HP overtook IBM 18 months ago to become the world’s biggest IT outfit, but IBM remains top for services - including IT outsourcing, design and maintenance. In fact last year, HP’s service division accounted for just 16% of its $104bn in annual sales, while services at Big Blue made up nearly 55% of its $98.8bn annual sales. Adding EDS’s $22.1bn (total) revenues last year with HP's services business would result in an IT services combo of £39bn; compared to $54bn in sales at IBM Global Services. So HP will stay smaller than Big Blue, but gains a leg up in value and, as a result of the deal, marketplace presence, according to Ovum analysts Phil Codling, Tom Kucharvy and John Madden. They said: “In an industry where we've become accustomed to IBM holding a significant global lead over the rest of the competition, the merger would thus bridge this gap substantially and establish the merged entity as the clear no.2 in IT services.” They explained that although HP has proved itself with large-scale outsourcing contracts, “it has nowhere near the reach and customer base of EDS” in some sectors, particularly government. “Such a combination [of HP/EDS] could open up new avenues for HP to peddle its stable of software and systems management products, as well as hardware,” the analysts said. In other words, the Texan IT contractor, which has been beefing up its tech consulting arm, will help HP climb the ladder in IT services a little. “What HP-EDS would still lack, however, is a business-oriented consulting capability that comes close to rivalling those of IBM or Accenture,” Ovum warned. “[And] 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.” Under the deal, EDS will retain its brand and the three-letter acronym will be the name of a new business group HP will set up, to be headquartered in EDS’s founding town of Plano. The specific IT services to be offered by HP/EDS will include IT and data centre outsourcing, networking services, managed security; business process outsourcing and financial processing. CRM and HR outsourcing will also be offered; alongside applications work, including development, modernisation and management; consulting and integration; and technology services for the workplace. Little wonder, then, that EDS hopes prospective clients will have little choice but to select what will be among the broadest portfolios of IT services anywhere in the world. The IT contractor believes the deal will benefit its existing clients, including the UK government, as well as new ones, not least because it can tap into HP’s $3.6bn R&D capability. Coupled with keeping its brand, this new resource is the main reason why EDS is confident it can avoid a ‘brain drain’ from its ranks, as HP takes over. Again, IBM appears to be the model to aspire to: Big Blue quickly incentivised consultants at PricewaterhouseCoopers Consulting to stay when it integrated with the business. Yesterday, a senior EDS insider said the company would do similar, saying that “obviously” it will “make changes” in order to keep its best brains. “There will be no immediate change,” he reassured, when asked about how IT staff, including freelance contractors, might be affected by the acquisition. “In the longer term, the combination of EDS and HP will enhance our competitiveness, innovation, overall capabilities and drive the long-term success of our organisation”. These improvements, he said, would put EDS in a “position to provide opportunities for our employees and contractors in the future.” May 14, 2008 Email this article Printer friendly page Previous Page
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