HP to buy EDS
Hewlett-Packard (HP) this week announced a deal to buy Electronic Data Systems (EDS), the large IT outsourcing company. The deal is for $13.9 billion, including debt.
The strategy behind this move is not hard to see. HP is big in there e=areas:
- office printers
- PCs,
- enterprise storage and servers, and
- IT services.
The printer area is where HP is the dominant player and it is even growing market share. The sale of ink and toner provides a major ongoing income. However, there is a limit to how many more printers they can sell and users can use. HP is trying to get everyone to print in color, but business and users are learning that color is an expensive proposition (by a factor of four to five over black-and-white) and, in most cases, unnecessary. The rate of growth is certainly going to slow.
HP has transformed itself--partly by the much criticized (but in the end successful) purchase of Compaq--into the leader in selling PCs, beating out Dell. It's done great over past few years in this area, increasing its lead. But the rate of growth in the future will have to slow, thanks to stumbling by Microsoft (Vista), and a renewed effort b it rivals, especially Dell, which has started selling its PCs in superstores as well as over the Internet.
Servers are a strong point. HP is second only to IBM worldwide now and growing fast.
But the big growth area may be in IT services outsourcing. IBM, the leader in this area, basically saved itself by gradually moving from hardware sales to services. IBM makes over $50 billion in s services. HP is already in the business, and adding EDS will double its income to around $50 billion, making IT services amount to over a third of HP's income. In addition, the outsourcing business can also sell all of the three other product areas (printers, PCs, and servers).
Many see this purchase as a bad move. EDS has had slow growth in recent years, it has a limited global presence and is too dependent on US corporations. On the other and, EDS has a set of 100 data centers already up and running, and has entry into a large number of corporations HP has not been involved with.
Now the absorption of EDS will take time, and there are serious culture differences between the Silicon Valley and that old-line Texas company. But HP eventually did a great job with Compaq, and they are apparently planning to let EDS run as a semi-independent division fir a while.
The real concern is competition from up-and-coming Indian IT services companies (such as Cognizant Technology Solutions and Satyam Computer Services), and the concern is that HP did not buy one of those. In fact EDS bought one of them, MphaiS, which it now runs as a semi-independent entity, with its own clients and sales. It's unclear what HP's plans would be for this division.
EDS has real if inhabitable assets in terms of long term contracts, relationships, and trust. EDS (unlike Yahoo) has an established business that needs a shot in the arm, one that HP could provide. This is not an amazing move, but it is defensible one, which extends HP's reach in an area it is already a player in, and gets rid of one of the big competitors (much like the Compaq buy did). HP's management has shown over the last few years that it can reinvent itself and reinvigorate established divisions, so I think the outlook is positive.
