Updated: HP to acquire EDS

Merger would create $1 billion operation in NZ

Hewlett-Packard is close to acquiring IT services company Electronic Data Systems for around US$13 billion, according to a report in the Wall Street Journal .

HP is the largest ICT supplier in New Zealand by revenue, not counting telcos, while EDS is the largest ICT employer.

HP reported local revenue of $602 million in the year to October 2007, while EDS reported $359 million in its latest local report, for December 2006. A merger or buyout, therefore, would create a near $1 billion operation in NZ.

The deal could be announced as early as Tuesday, according to the news report, which cited sources close to the matter.

The acquisition could boost HP's services business.

In statement on its website, HP confirmed it is engaged in advanced discussions with Electronic Data Systems Corporation regarding a possible business combination involving the two companies. "There can be no assurances that an agreement will be reached or that a transaction will be consummated. HP does not intend to comment further until an agreement is reached or discussions are terminated," the statement says. HP has cut a swathe through the ICT industry in the past decade, acquiring Compaq, and many others internationally and the operations of CSC in New Zealand and later Cap Gemini NZ. Even after the merger, however, the combined companies' global services revenue would fall about US$10 billion short of that of IBM, based their figures reported for 2007, said Dana Stiffler, research director with AMR Research.

The market at stake was worth US$672.3 billion worldwide in 2006, a 6.4% increase from 2005 according to a Gartner study released about a year ago. While IBM led the market with about US$48 billion in revenue compared to second-place EDS with about US$21 billion, EDS' 7.6% growth outpaced IBM's 1.8%. HP took in about US$16 billion in services revenue and grew 2.1% between 2005 and 2006.

The deal would strengthen HP's services capability in some areas but not others. EDS would give HP a boost in custom application services and infrastructure management services, but less so in managing packaged applications from the likes or Oracle and SAP, Stiffler said.

"Another thing it wouldn't give HP is a strong business consulting presence, a go-to-market capability where you address operational executives and line of business people as much as the CIO," she said.

EDS may well be open to an acquisition though, according to Stiffler. "I think aligning themselves to HP makes them potentially a more future-focused and viable competitor than they are as a standalone company," she said.

There is a challenge for both companies.

"Both HP and EDS grew up in a traditional world prior to India emerging as a global delivery center," Stiffler said, noting that Indian companies such as Wipro are focused on providing low-cost application development services.

It's a fairly bold move by HP, said Kathryn Hale, research vice president at Gartner.

"That is just amazing. It sounds more than just speculation."

Only HP, which earns US$17 billion in revenue in 2007, has the wherewithal to acquire EDS, which is second in outsourcing revenue at US$22 billion, Hale said. That would make it the second-largest services company in the world, bringing it closer to IBM, which earned US$54 billion in services last year.

HP's services focus mainly on product support and the EDS acquisition could give HP the professional services revenue it would need to be considered a serious threat to IBM, Hale said. HP will also be able to use EDS' global network to expand its services presence, Hale said.

EDS has been struggling recently and HP acquisition would make a difference to both companies, Hale said. In its most recent earnings conference call, EDS talked about layoffs. — Additional reporting by Rob O'Neill, Computerworld NZ

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