Analysis: Why Hewlett-Packard wants EDS

Analysts aren't certain if the proposed merger will really help HP and EDS, even if they can see logic to some aspects of it

Mark Hurd, the CEO of Hewlett-Packard, likes automation, not people. Offshore labor will reduce costs, but automating things "eliminates costs," he has said.

Hurd wants "lights-out datacenters." He has not championed the need for developing a massive, people-intensive services organization -- which exactly what he will get if HP acquires Electronic Data Systems. Both companies confirmed Monday they are in "advanced" in talks about a merger.

[ For complete coverage of the EDS acquisition and its ramifications for HP, see InfoWorld's special report. ]

Plano, Texas-based EDS will add some 139,000 employees to HP's 159,000 workforce, but only about $22.1 billion in revenue, which is what it finished 2007 with. HP ended last year with $104 billion in revenue.

So where is the benefit to HP and EDS customers? And what are the risks? The last time HP decided to merge with a large Texas-based company it did not go so well. The 2002 Compaq merger engendered a contentious battle and a difficult integration, and was a major reason why Hurd's predecessor, Carly Fiorina, resigned in 2005.

Are they Blue? (No.)

Hurd has rejected the idea of developing an IBM -like services organization. And while the parallels to Big Blue's offerings will be fast and furious, there are critical differences between EDS and IBM global services.

EDS is focused on infrastructure services -- running datacenters, help desks, and networks, which gives Hurd opportunity to replace people in a datacenters with HP hardware and technology. And EDS would give HP access to a lot of datacenters

And then there's that animation question. "We have to automate more things," said Hurd, at a Morgan Stanley conference March 2007, in response to a question (download PDF) about IBM's services offerings. "When you take on a datacenter from a customer, a customer gave it to you for a reason. Typically they gave it to you because it's screwed up and they don't know how to fix it. So if you don't have the tools right, all you've done is inherited a screwed-up, underleveraged capability. So you have to transform it or else you're not going to make any money either."

IBM, like EDS, provides infrastructure services. But it is also big on management consulting, and that's where they part ways. EDS tried to become more IBM-like when it acquired management consulting firm A.T. Kearney in 1995, but this acquisition never really added to EDS's bottom line and A.T. Kearney returned to private ownership in 2006.

A match made in...?

Analysts aren't certain if the proposed merger will really help HP and EDS, even if they can see logic to some aspects of it.

A merger means that HP "is buying an IT services battleship," said Paul Roehrig, an analyst at Forrester Research in Cambridge, Mass. It's a move that will extend HP's global capability, enrich their customer base, and, in theory, do a lot of HP services, he said. But "I'm not sure why they need to do this."

A trend in outsourcing has been a movement away from mega-deals, in which one vendor provides soup-to-nuts IT services and equipment. Today, many enterprises deal with multiple vendors to fill specific IT niches, leveraging them against each other and swapping them out as needed. That's hard to do when you are dealing with a goliath.

"EDS won a lot of business because they were not IBM," said Peter Allen, a partner and managing director of TPI in Woodland, Texas, meaning they were independent from hardware products.

But Allen said the deal may make sense if acquiring EDS will put it in a better position to offer cloud-type computing services, as part of the broader user shift to service providers. "Is this part of a vision of how corporations will procure computing resources?"

HP already has a significant services operation, which generated about $16.6 billion last year, said Stan Lepeak, a managing director at EquaTerra, a Houston-based consulting firm. EDS has been expanding in human resources business process outsourcing, something HP is doing as well. "I think they (EDS) have a pretty broad range of offerings that tie closely to the HP product set," he said.

For HP there has always been a little bit of an underdog status with IBM because of it services organization. And while competitors may knock IBM services as organization intent on selling its hardware, Charles King, an analyst at Pund-IT in Hayward, Calif, said "the fact is that IBM doesn't hold a gun to anyone's head."

"As datacenters become increasingly complex and increasingly distributed, they become harder and harder for businesses to get a handle on them," said King. This will make services such what HP can offer with EDS more appealing. It will also allow HP to "compete more effectively with IBM -- IBM is the company they are gunning for," he said.

Computerworld is an InfoWorld affiliate.

This story, "Analysis: Why Hewlett-Packard wants EDS" was originally published by Computerworld.

Copyright © 2008 IDG Communications, Inc.

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