Forum: Why HP's EDS buyout will not transform ICT services

Locally, HP doesn't just have to integrate EDS, it has to turn it around

The story of Hewlett-Packard’s EDS buyout has so many angles it’s hard to know where to start. But the one that attracts my attention is the contrast between this deal and Microsoft’s failed raid on Yahoo.

Those differences say a lot about exactly what kind of company EDS is — and what this consolidation is all about.

In its last full financial year, EDS eclipsed Yahoo in revenue, reaping US$22 billion (NZ$28.9 billion) compared with Yahoo’s US$6.97 billion. By that measure, EDS is roughly three and a half times Yahoo’s size.

However, when we look at profitability, the picture changes dramatically. Yahoo made US$660 million in net profit in 2007 compared with EDS’s US$828 million. Yahoo’s profit was down on 2006 while EDS’s was up.

Now, consider: in February, Microsoft valued Yahoo at US$44.6 billion while HP values EDS at a mere $13.9 billion. What gives?

The answer to that is the EDS simply is not at the cutting edge of business any more. It does not employ large numbers of talented developers. It does not own or create strategic web properties. It’s no longer changing the world. Its best route to profit is through cutting costs.

EDS is a solid business but it is also the nearest thing IT has to an old fashioned industrial giant. It was only a couple of years ago that the company’s Australian staff did the unthinkable in joining a union and going on strike.

Let’s think about what all this means locally.

EDS’s core business is outsourced systems management. It wins deals and usually takes over IT staff from the organisations choosing to outsource. In New Zealand, many of these are government organisations, but some of our largest corporates, for instance Telecom and Fonterra, are customers too.

In 2006, EDS New Zealand made total revenues of $358.7 million, down from 2005’s $397.7 million, which in turn was down from 2004’s $411.8 million. Net surplus was $7.3 million, down from $25.5 million. So, the local operation is heading back to the size it was in 2003. Locally HP not only has to integrate EDS — it has to turn it around.

According to 2007 figures from research company IDC, and assuming no customers are lost during the integration, the combined services operations of HP and EDS in New Zealand will be around 13.4%, pushing

Gen-i into second place on 13.1%. Datacom is in third on 7.3% and IBM next on 5.5%.

What the deal does is create (eventually, once EDS has been “culturally transformed”) a near $1 billion IT organisation here. That is significant, but more nimble local competitors such as Datacom and Revera have been doing pretty well against EDS for the last few years and there’s no reason that can’t continue. The buy will have even less effect on the likes of Gen-i or Axon or even Unisys.

In short, it’s hard to see why higher value or customer-oriented local providers should be worried about this consolidation. As international analysts have said (see pages eight and 28), the deal looks like a market share play. It doesn’t create a higher level conversation with customers. One analyst even suggests HP is paying too much.

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