HP challenges IBM for service supremacy with $13.9 billion EDS buyout

Stan Beer
Tuesday, 13 May 2008 18:18

IT Industry - Strategy

In a move that pits Hewlett-Packard against IBM in a struggle for leadership of the massive IT services market, HP has acquired EDS for US$13.9 billion. The acquisition will more than double HP's services revenue of $16.6 billion in 2007, with the combined revenues of both companies for that period totalling $38 billion. The acquisition deal will be closed in the second half of 2008.

While the EDS acquisition will give HP considerably more reach in the lucrative services space, it will still have some distance to make up in order to close the gap on market leader IBM Global Services which had revenues of $54 billion in 2007. However, for the first time IBM in recent history will be under pressure from a serious competitor with similar scale.

According to technology research analysts from Ovum, Phil Codling, John Madden, and Tom Kucharvy, the EDS acquisition is a market shaker. Prior to confirmation of the HP and EDS merger, the OVum analysts had this to say:

“It’s become axiomatic to say that the IT services market is consolidating. In actual fact, in contrast to the software sphere, there have been very few large deals in recent years, with most of the merger activity confined to small and mid-sized moves (Logica buying Unilog, CSC buying Covansys, and so on). The top ten or so of the IT services industry have barely changed places, let alone ownership, despite interminable rumours and private equity interest. But here comes a possible very big play indeed – big not just for HP and EDS, but also in terms of its potential to shake up the entrenched competitive landscape in global IT services.

“In terms of capabilities, EDS would bring depth and experience to HP’s IT outsourcing organisation. Although HP has proved it can handle large-scale global outsourcing contracts (such as P&G), it has nowhere near the reach and customer base of EDS in some sectors and markets, particularly government contracts. Such a combination could open up new avenues for HP to peddle its stable of software and systems management products, as well as hardware (although realistically many of EDS’s clients already use HP gear).”

However, the Ovum analysts sounded a word of caution, noting that large acquisitions always posed risks in the area of integrating two corporate cultures.