Update: HP-EDS deal spurs range of customer reactions

Some EDS customers fear that HP's buyout could lead to layoffs and a reduction in services

Customers of Hewlett-Packard and Electronic Data Systems offered a range of reactions Tuesday to HP's $13.9 billion bid for the massive outsourcing company.

HP will benefit from EDS' talent pool, but the specter of layoffs -- which EDS president and CEO Ronald A. Rittenmeyer indicated Tuesday would be possible as the companies integrate -- raises concerns about customers' existing deals, said Nina Buik, president of Encompass, a HP user group that says it has 50,000 members.

[ Special report: HP scoops up EDS ]

"From a business perspective, I understand when you consolidate staff there's going to be duplicate jobs," Buik said. "I want to make sure the customers are still getting the level of service they signed up for. That would be my concern."

HP's pending purchase, which will bring it in close competition with services leader IBM, has been approved by both companies' boards of directors, and is expected to close in the second half of this year.

The deal will result in a new unit called "EDS -- an HP company," based in Plano, Texas, where EDS has its headquarters. Rittenmeyer will lead the new unit and report to HP CEO Mark Hurd.

Joe Lovetere, president of Hub Technical Services, said he was surprised by HP's move, but called it "exciting" and not likely to be a threat for his South Easton, Mass., company, which resells HP's hardware and provides services.

"I don't think that it affects our business in terms of the market segment we have," he said, explaining that it is divided between the public sector and SMBs. EDS goes after the biggest accounts, Lovetere said.

One of those is Xerox, which has spent billions of dollars on EDS services during the past couple of decades. The company signed a $263 million deal in April that will see EDS manage and support its end-users, service desk, and mainframe operations. It was a recent milestone in a long relationship.

Xerox's latest deal with EDS provides it with "flexibility in the event of changing business circumstances," and the pending acquisition could well qualify as such, said Carl Langsenkamp, director of public relations at Xerox.

However, he declined to speculate on whether Xerox would, in fact, look to alter the contract.

The company has a "two-fold relationship" with EDS, partnering with it as a member of EDS' Agility Alliance, which brings together offerings from a range of vendors into an "agile enterprise platform," he said.

Meanwhile, HP and Xerox compete in the office printing business, but Langsenkamp downplayed the potential impact. "This move seems to retrench them in IT outsourcing, but not document management," he said.

HP's hardware division presents another potential wild card for customers, should HP attempt to move EDS clients over to its computing platforms.

Hurd insisted during a conference call Tuesday that EDS would resist such an obvious temptation and remain hardware-agnostic.

This scenario is believable, Lovetere suggested.

"EDS is still a stand-alone business with a core group of customers and a core group of relationships," Lovetere said. "Trying to force customers onto platforms they don't have comfort level with doesn't make good business sense."

The acquisition will benefit both companies in the long run, said Rick Morris, chief information officer of Dollar Thrifty Automotive, which signed a five-year IT services contract with EDS worth $150 million to manage application development, network, and hardware management.

"I would be more worried if they were merging with a lesser-known commodity than HP," Morris said.

With HP being a products company and much of EDS' revenue coming from infrastructure outsourcing, the acquisition is a natural way to try to expand in the services business, he said.

The combined company could lower Dollar Thrifty's IT operation cost by bringing in HP's product culture and more scale, Morris said, adding that HP could also reinforce and enable EDS' strategy to make business applications for the travel and transport industry.

Yet, there are concerns. EDS has a big focus on the travel and transportation industry, and Morris questioned whether HP would retain that vertical focus. Questions also remain about HP's ability to effectively integrate EDS' operation and culture, Morris said.

"The HP-Compaq merger seemed pretty messy; the major thought would be, would they execute this better," Morris said. HP's acquisition of Compaq for $25 billion in 2001 was considered a failure, as the company didn't generate hardware profits as a result. Former CEO Carly Fiorina, who oversaw HP's buy of Compaq, was replaced by Hurd.

While the deal could present issues for some vertical markets, it could translate to better IT integration for health care organizations, said Elizabeth Messina, CIO of Blue Cross Blue Shield Arizona. Blue Cross already uses HP hardware and recently renewed a contract with EDS for claims-processing hosting in March.

Blue Cross has been an EDS customer for 15 years and the acquisition could allow HP to expand its offerings, Messina said.

"This allows [HP] to come forward with hardware solutions with services to provide at competitive prices," Messina said.

The EDS deal could overall catapult HP near the top of a space worth $748 billion in 2007, according to recent figures from Gartner.

IBM led the market with about $54 billion in revenue, followed by EDS with $22 billion. HP was in fifth place with revenue of $17 billion, behind Accenture and Fujitsu.

(Peter Sayer in Paris contributed to this report.)

This story was updated May 13, 2008.

Copyright © 2008 IDG Communications, Inc.

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