HP has already overhauled the venerable International Business Machines (IBM) in total revenue this year to become the largest computer systems and services company in the world. By Sourya Biswas
Hewlett-Packard (HP) is acquiring Electronic Data Systems (EDS) for a whopping $13.9 billion, or $25 per share. This represents a generous 32.6-per cent premium over EDS' closing price of $18.85 on Friday, before talks of the acquisition became public. (See: HP set to acquire EDS for over $12 billion)
The multi-billion-dollar-question now is what is HP is getting for its big bucks?
HP has already overhauled the venerable International Business Machines (IBM) in total revenue this year to become the largest computer systems and services company in the world. Now, with this acquisition, it proposes to challenge Big Blue's pre-eminent position in IT services specifically while doubling its revenue from this stream.
This deal catapults HP from its current fifth position in IT services to the runner-up spot just behind IBM. Moreover, it becomes twice as large as the next player in the game, Accenture.
|The big boys of IT services: revenues decrease from left to right|
|Company ||IBM ||HP ||EDS ||Accenture ||Fujitsu|
|Founded: Date ||1889 ||1939 ||1962 ||1989 ||1935|
|Headquarters ||Armonk, New York, US ||Palo Alto, California, US ||Plano, Texas, US ||Hamilton, Bermuda ||Tokyo, Japan|
|Chief executive ||Samuel J Palmisano ||Mark V Hurd ||Ronald A Rittenmeyer ||William D Green ||Hiroaki Kurokawa|
|Revenue (total) ||$98.8 billion ||$104.3 billion ||$22.1 billion ||$21.4 billion ||$43.2 billion|
|Revenue (IT services) ||$54.0 billion ||$17.2 billion ||$22.1 billion ||$21.4 billion ||$18.6 billion|
|Revenue (other) ||$44.8 billion ||$87.1 billion || |
|Net income ||$10.8 billion ||$7.3 billion ||$0.72 billion ||$1.3 billion ||$0.48 billion|
|Employees ||386,000 ||309,000 ||136,000 ||178,000 ||161,000|
With annual revenue of $22.1 billion last fiscal year, EDS gives HP instant scale and a chance to win large contracts. HP's own services unit brought in $17.2 billion last fiscal year. Together, the two companies will have about 210,000 employees in IT services with reach in 80 countries, and will be a firm challenger to IBM.
This move by HP can be considered as a culmination of its unsuccessful efforts to buy the consulting arm of PricewaterhouseCoopers way back in 2000. Unfortunately for HP, IBM acquired the company two years after its efforts came to a naught.
HP's push into business services provides it with increased revenue that is reliable and more resistant to downturns in the economy. Even though technology services business constitute only 16 per cent of HP's $104 billion annual revenue, it's considered a lucrative segment that holds a lot of business opportunities as companies and government agencies look at providers to manage their technology infrastructure and provide software, hardware and services.
With the EDS acquisition, HP becomes a one-stop-shop for all such large-scale requirements.
One of the greatest advantages that HP will get from this deal is EDS' expertise in snagging government deals. In the last fiscal year, EDS pulled in $2.5 billion in revenue from large government contracts, while HP brought in just $500 million.
Another important fact uncovered recently is HP's quiet buyout of data center design firm EYP Mission Critical Facilities in November last year. Post the EDS deal, it has been proposed that HP is building a one-stop data center shop.
With EYP and EDS, HP becomes the sole vendor capable of planning, designing, building, equipping and supporting large-scale data centers from start to finish and at an opportune time in the market, a time of major data center refreshes. A good chunk of existing data centres were built out in the late 1990s as the dot-com bubble bulged and now are nearing the end of life.
Another advantage for HP will be additional sales of its hardware and middleware through EDS. Storage hardware and software vendor EMC may also be faced with more competition. The company may see some EDS equipment sales displaced by HP, but will stand up to the competition. However, Dell, which sales a lot of hardware to EDS, will be a major loser.
HP CEO Mark Hurd waved off concerns about potential integration problems by keeping EDS a separate business group with Rittenmeyer reporting directly to him. The move reflected the acknowledgment of EDS being the more established leader, and will set the tone for the combined companies' services business.
"Frankly, EDS is more mature and more sophisticated in many of the processes that they bring to market than where we are," Hurd said in a conference call.
Also, the changed dynamics of the HP-EDS relationship will affect their customers and competitors in India. By becoming a third or even second player in some areas, the HP-EDS entity may refine the competitive scenario in the country's tech market place.
Emergence of a formidable third player will mean additional pressure on multinational companies and top domestic players like TCS, Infosys, Wipro and Satyam. Even after the acquisition of Compaq sometime ago, and Mercury recently, HP was still perceived as a hardware player.
All that is about to change, as EDS will give HP more depth with additional capabilities in IT infrastructure, IT application, back-office services and consulting. This means more competition for the Indian majors as well as international players like IBM, Capgmini and Accenture.