HP closes $13.9b EDS deal

EDS is now an HP company; HP announced last Tuesday that it had completed its $13.9 billion acquisition of the Plano, Texas-based outsourcer. Coming a little more than three months after the deal was first announced - and following what seems to us like the most rapid approval process for a deal of this size in recent memory - HP now embarks on an ambitious and critical integration plan, the details of which will become clearer soon.

Managing the expectations of all the stakeholders in large M&A situations is never easy, but HP has set out on a strong path. The day that a deal officially closes sees everyone wanting to know every piece of detail about everything for the next three years - clearly unfeasible.

We don't expect HP to have all the answers at this stage, and if it does have answers, it has perfectly legitimate reasons - legal and otherwise - not to divulge them yet (many EDS employees are only hearing about HP's plans for the first time this week).

And it's important to remember that HP has completed more than 20 acquisitions since CEO Mark Hurd's arrival - so to say it has done this before is a bit of an understatement. A team of some 500 people have worked on the EDS integration plan which will be rolled out (somewhat ambitiously, we would say) on a 12-18 month timeline, according to HP. More information will come mid-September, when HP hosts securities analysts to discuss financial issues.

The announcement was truly historic for the IT industry, if a bit anti-climactic on how much detail HP was willing or able to disclose about its next moves. HP was very proactive in meeting with analyst firms like Ovum to discuss the deal's close, and updates later this year are already planned; we applaud that approach. But much of what was covered had already been publicized: HP's outsourcing organization will be folded into EDS, which now becomes HP's fourth business group and which will remain based in Plano.

EDS CEO Ron Rittenmeyer will continue in his leadership role, and the EDS Agility Alliance will continue with EDS's new parent company as a primary member.

In parallel to the analyst outreach were a whole series of customer, investor, and staff communications - giving as much detail as could be expected on day one of the deal. There was also confirmation of when a series of further communications would come out to the various communities. All good, but we think there is an argument for an additional flavor to these communications.

Some of the most critical questions on headcount reduction and improving EDS's cost structure - which will be accomplished, no doubt, by leveraging HP software, tools and best practices - are still to come.

There's also the important matters of how acquiring EDS will alter HP's go-to-market model, sales structure (both in outsourcing and in the company as a whole) and services delivery organization.

Confirming the timetable of when these key decisions will be taken and implemented would build additional confidence and give the community milestones to monitor.

In essence this is about opening up some of the major milestones in the 30- 60- and 90-day period.

 

Customers overall are in equal parts encouraged, cautious and anxious about an HP-EDS combination.

[x-head] Continuity

HP is telling customers of both companies that its top priority is providing continuity during the integration, with no decline in quality or service delivery. By setting more explicit expectations, and by being a bit more open in communicating the integration plan, HP can provide customers with comfort along with continuity - as well as help convince Wall Street watchers that EDS was worth its history-making price.

According to HP, portions of Consulting & Integration dealing with more "industry standard" services, such as SAP and Oracle services, will shift to EDS's consulting group.

C&I capabilities that are embedded with specific HP products and solutions will remain part of the TSG business group (TSG will also retain HP's technology Support Services group). We think this change for C&I in the long term will be a very sound move - pending more details, of course.

We've argued that keeping consulting close to the outsourcing organization is one way HP can position itself in the future as a stronger competitor and alterative to consulting giants such as Accenture and IBM - provided that HP continues to make additional consulting investments.

The "new" global EDS leadership team, with Rittenmeyer at the helm, was also formally announced, and many current EDS executives will be staying on.

Bill Thomas, a long-time EDS EMEA executive, will serve as senior vice president for Europe, Middle East & Africa. Andy Mattes, previously senior vice president of HP Outsourcing Services, will become senior vice president of Application Services. (It sounds like long-time EDS executive Charlie Feld, who helped build EDS's application services business essentially from the ground-up, will not be staying for long.) This team will be charged with leading a combined HP-EDS services business that, as of the end of fiscal 2007, had annual collective revenues of $38 billion and 210,000 employees.

As for the services portfolio, the focus will remain mostly the same as HP and EDS combine their assets and capabilities: three horizontal groups - infrastructure technology outsourcing, application services, and business process outsourcing - will be offered across eight well-established vertical industries - communications, media and entertainment (CME), consumer industries & retail, energy, financial services, government & defense, healthcare, manufacturing, and transportation.

John Madden, Research Director, Ovum Summit / David Mitchell, SVP IT Research

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