HP Tuesday announced its plans to acquire EDS for US$13.9 billion in a deal that would double HP's services business and revive EDS' position as a leader in global technology services. The acquisition will catapult HP's annual revenue for services from less than US$20 billion to nearly US$40 billion and position HP as the second largest services provider in the world. Here is a look at what is happening and why now.
What are the basics of the deal?
HP will purchase EDS at a price of US$25 per share, or an enterprise value of approximately US$13.9 billion. HP expects the deal to close in the second half of this calendar year, and the company reports the terms of the transaction have been unanimously approved by both HP and EDS' boards of directors. HP intends to establish a new business group to be branded EDS and located at EDS' Texas headquarters. After the deal closes, EDS will continue to be led by EDS Chairman, President and CEO Ronald Rittenmeyer, who will report to HP CEO Mark Hurd.
What does EDS bring to the table for HP?
"In a word -- big revenues," says Ben Pring, research vice president at Gartner.
EDS is the No. 2 vendor in IT services (behind IBM), reporting US$22.7 billion in revenue for fiscal 2007, according to Pring, who says by acquiring EDS, HP will immediately more than double its revenue for services. HP reported its fiscal 2007 services revenue at US$16.6 billion. While Big Blue brings in about US$54 million in services revenue, the EDS acquisition will enable HP to quickly accelerate its position in the global technology services market.
"IT services are a big and strategic part of the marketplace and they influence technology purchases downstream," Pring says. That means if IBM Global Technology Services is working with a client at the services level, there is more of a chance the customer will buy IBM technology. If HP can get its foot in the door with more services customers, hardware and software sales could follow.
"If HP had a bigger professional services umbrella and footprint, they would get greater access to a very strategic marketplace," Pring says.
What is the overlap between HP services and EDS offerings?
HP services today primarily focus around product support. EDS offers broader services that include data center management, network management and application outsourcing. The overlap could be minimal, Pring says, and enable HP to move beyond professional services designed to get its products up and running in customer IT shops to offering large-scale outsourcing services.
"They don't have a huge overlap with the other business. There will be some stripping out of overlap and overhead to be sure, but HP will be getting a new set of services expertise to offer," Pring says.
Why do this deal now?
HP isn't shy about spending money on acquisitions; it purchased Mercury Interactive for US$4.5 billion and some say the vendor overpaid for Opsware when it put down US$1.6 billion for the automation software vendor.
In the past decade, EDS has seen some hard times and perhaps the company didn't bounce back to its former glory quickly enough to compete with IBM.