HP and EDS agree to merge

It's become axiomatic to say that the IT services market is consolidating. In actual fact, in contrast to the software sphere, there have been very few large deals in recent years, with most of the merger activity confined to small and mid-sized moves (Logica buying Unilog, CSC buying Covansys, and so on).

The top ten or so of the IT services industry have barely changed places, let alone ownership, despite interminable rumours and private equity interest. But here comes a 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.

Adding EDS (with revenues of €14.3 billion/US$22.1 billion in 2007) will more than double the size of HP's services business (€10.75 billion/US$16.6 billion in revenues). The resulting €25.23 billion (US$39 billion) services operation will still be smaller than IBM Global Services (with revenues of €34.95 billion/US$54 billion). But in an industry where we've become accustomed to IBM holding a significant global lead over the rest of the competition, the merger will bridge this gap substantially and establish the merged entity as the clear no.2 in IT services.

Moreover, an EDS-HP combo should be able to deliver greater global reach and economies of scale than either firm separately (with, potentially and eventually, cost and service delivery benefits for customers).

In terms of capabilities, EDS will bring depth and experience to HP's IT outsourcing organisation. Although HP has proved it can handle large-scale global outsourcing contracts (such as P&G), it has nowhere near the reach and customer base of EDS in some sectors and markets, particularly government contracts.

The combination should open new avenues for HP to peddle its stable of software and systems management products, as well as hardware (although realistically many of EDS's clients already use HP gear).

A deal should also improve, to a lesser degree, HP's Consulting & Integration unit. EDS, recognising its disadvantage compared to IBM, Accenture and others, has focused on beefing up its technology consulting capabilities, with an increased emphasis and investment on applications services/consulting  -  the company recently formed an SAP practice, for example.

What HP-EDS still lacks, however, is a business-oriented consulting capability that comes close to rivalling those of IBM or Accenture. In other words, EDS will help 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 programme. In hindsight, HP's integration challenges/successes with the huge Compaq merger (in 2002) were overshadowed by the blistering investor/management fight that preceded it.

It's difficult to comment on how an HP-EDS integration will proceed, but it will inevitably entail risks. Combining services portfolios and delivery platforms to maximise economies of scale will be a huge task. Of course people are the greatest asset of a services business and, despite HP's newfound organisational efficiencies under Mark Hurd, HP needs to move quickly to stem any potential "brain drain" from EDS.

 

HP and other global companies are battling to attract new talent and retain what they have, especially in active markets such as enterprise resource planning (ERP) deployments and application modernisation - and any merger provides employees with a chance to reassess their career paths. Although not a perfect comparison, HP could take a lesson from IBM and its PwCC acquisition.

IBM moved in quickly with incentives to make sure the bulk of PwCC partners stayed on through the integration, even maintaining elements of PwCC's partner-led organisational structure. The result was less employee attrition post-merger than many had predicted.

Ultimately, whether IBM, Accenture, CSC and Capgemini need fear the outcome of this potential deal will rest on the success or otherwise of what would undoubtedly be a very ambitious corporate integration project. On paper an HP-EDS combination looks workable. But in practice it could prove anything but.

Phil Codling, Principal Analyst
John Madden, Research Director, Ovum Summit
Tom Kucharvy, Senior Vice President, Ovum Summit

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