HP will complete its acquisition of EDS in the next week or so. HP is spending almost $14 billion on buying the services company that had revenues last year of $22 billion. HP says it will establish a new business group, to be branded ‘EDS - an HP company’, headquartered at EDS’s existing executive offices in Plano, Texas. EDS will continue to be led after the deal closes by EDS Chairman, President and CEO Ronald A. Rittenmeyer, who will report to Mark Hurd, HP’s chairman and CEO.

That has all the hallmarks of a portfolio investment. Yet most analysts and blog commentators have focused on what synergies and savings can be expected. They assume that HP’s services revenue of $16.6 billion in fiscal 2007 will be merged to make a services giant that matches IBM. We shall see.

Much has also been made of comparisons with HP’s 2002 acquisition of Compaq for $19 billion. Integrating the two was hard and expensive and ultimately brought down the architect of the purchase, Carly Fiorina. TekPLus does not think too much should be made of such comparisons. While both companies were not crippled they were both certainly limping. They were both based in Texas. Beyond that the parallels disappear. One’s in services and the other was in hardware. One is involved in huge contracts, the other in manufacturing and distribution. One appears to have a future as a standalone subsidiary, for the other integration with an existing business was vital.

The merger is undoubtedly good news for EDS shareholders and even HP’s shareholders are reasonably sanguine as their share price only took a hit of 5% when the news broke. We tend to share the view of Mike Gunderloy at Ostatic, http://ostatic.com/161913-blog/hp-eds-and-open-source#continue
“In the short run, this will be like any other big merger: existing open source and commercial offerings will remain much as they are now…Clearly they’ll start selling HP servers into their accounts”.

But what about the longer term?

Will HP have the skills in place to implement the turn around required at EDS without diluting margins? EDS brings a lot of baggage especially around its weak GDM model as well as high-end consultancy having disposed of its A.T.Kearney business.

We in TekPlus think it depends upon the services mix and what will stay in Technology Solutions Group (TSG) and how Computing Solutions Innovations (CSI) will develop. Hurd, in an interview with Fortune, http://bigtech.blogs.fortune.cnn.com/2008/05/14/hp-and-eds-a-chat-with-ceos-mark-hurd-and-ron-rittenmeyer/ said TSG would simply be educated to go to market with the EDS offerings.

We have noted a lot of prime process level services in vertical sectors as well as managed services going to Asia – either to Indian outsourcers or off-shoring by western majors. If EDS is leveraged in Asia there could be some very quick wins on the cards. TekPlus view errs on the side of seeing positive outcomes. Not so other analysts and bloggers.

Some observers think that the background of HP’s Hurd is cost-cutting. Patrick Thibodeau in Computerworld http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9085078 thinks Hurd has rejected the idea of developing an IBM-like services organization. As EDS is focused on infrastructure services — running data centres, help desks and networks, he says, Hurd can cut costs by replacing people in a data centres with HP hardware and technology.

HP has been going on about its data centre reduction since it was announced in 2006. The company is to shrink 85 data centres, thousands of servers and thousands of applications down to six mega computing facilities at Atlanta in Georgia, Houston and Austin in Texas. It’s the evolution towards cloud computing on which HP is working. http://www.hp.com/hpinfo/newsroom/press/2008/080729xa.html?jumpid=reg_R1002_USEN

Nick Carr at the Rough Type blog http://www.roughtype.com/archives/2008/05/hp_rolls_up_eds.php has similar views on “… an acquisition aimed at boosting profitability through consolidation and cost reduction in a mature business”. With EDS at close to 140,000 employees it has nearly as many people as HP so there is obvious room to make cuts.

Ashley Vance at the Register http://www.theregister.co.uk/2008/07/11/butcher_hurd_hp/ describes Hurd as the Butcher but blends it with a positive if harsh vision of the future. “The $12bn marketing gamble only pays off if people really start consolidating on a massive scale, and they will…Most companies will try and reorganize their own operations before reaching that utility computing end point. So, that’s customer X looking to get rid of gear and then gradually moving applications into the fabled cloud over many years…HP can at least make as much money as possible off the shrinkage”.

HP’s shares were surfing just below $50 in May. Once news of the bid leaked, they slipped to close at $46.83. By August – when HP has to write those cheques for the EDS shares it has bought – the price has slipped further to $44.40. Hurd must demonstrate his ability to burnish shareholder value - that will decide whether he is there for the long term or sees a Fiorina finish.