HP buys EDS: What are they thinking?

Backward looking forward statements

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Analysis Mark Hurd must know what happens to HP bosses who strike a legacy-defining deal.

He’s the man who took over from Carly Fiorina, shortly after her takeover of Compaq turned out to be not quite such a big idea after all. The Compaq integration was managed to death – and yet you’d be hard pressed to point at much of what remains of that once great company in today’s HP, bar a few brand names that end with a Q. While it wasn’t a complete disaster, in retrospect it wasn’t exactly a roaring success.

Still, every deal is different, so let’s take a quick run around the mooted EDS and HP tie-up.

First things first, EDS is simply not the colossus it was. It ran aground earlier this decade with its $8bn Navy Marine Corp Intranet contract. This deal sunk then CEO and chairman Dick Brown and, almost, the company.

The firm was forced to bring in a veteran management team headed by former CBS chief Michael Jordan to save its own sinking ship. Jordan and crew certainly steered the company through some horribly troubled waters. Still, it’s worth remembering that at the beginning of this decade, EDS’ revenues were within spitting distance of $20bn, with net income around the $1bn mark. For 2007, revenues were $22bn, with net income of $1.1bn. So, not terribly different then.

A glimpse at EDS’ share price focuses the mind even more. It closed yesterday at $24.13, after leaping from $18.95 at the start of trading. Of course, that leap came at the end of the day, after the HP $13bn bid leaked. In 2000, its shares were touching $70.

Oh, HP’s shares were surfing just below $50 most of the day. Once news of the bid leaked, they slipped to close at $46.83. Still, HP is still worth about $115bn, while EDS, even with yesterday’s boost, is worth a mere $12.13bn.

This suggests that EDS is much more easily digestible for HP than it might have been, say, six years ago. And sucking in EDS would more than double HP’s own services revenues.

And Jordan’s salvage team has jettisoned much of the debris. They spun off the AT Kearney consulting arm, and other non-core businesses. They ploughed on with a hard-hitting “best shoring” program. Actually, we all know it was an offshoring program, swapping lots of those expensive US and Europe-based developers and consultants for new staff in India and such like, and driving down costs.

So Michael Jordan and his team have produced a company where a lot of heavy lifting in terms of turnarounds has already been done. HP would be buying a firm that already has its offshore operations in place, along with a host of big name clients locked into long-term deals – even if the world is supposedly turning away from the mega-deals that dominated the IT services market in the late 90s and early 2000s.

That also means Hurd and HP might be limited in how much debris they can jettison themselves. And it is this ability to burnish shareholder value that will decide whether investors smile on the deal in the long-run.

Still, initial reports have suggested that Hurd has a strategy to replace EDS people with machines, i.e. automating datacenters and stuffing them full of HP kit. Sure, this sounds like a plan. Leverage, consolidate and rationalise EDS operations, with your own kit. It’s what HP is already doing with its own infrastructure afterall.

Swapping people for machines brings another benefit - you avoid all those tricky cultural issues that often seem to derail mega mergers.

And let’s face it, these two firms have cultural issues in abundance. Can Californians and Texans really get along? Arnold Schwarzenegger might get on with George Bush, but that’s pretty unusual. We’re talking about the company that defined Silicon Valley here – all free thinking, collaborative, innovative spirit – coming together with a hierarchical, buttoned up Texas-based outfit whose most salient characteristic as far as the outside world was concerned was hostility towards facial hair.

Both stereotypes have as much to do with history now, though. What we’re left with is a services giant looking for a future, and a server and printer company that still yearns to be a services company.

Whatever the two firms want, it’s fair to say the precedents for such a massive merger aren’t great. Oh look, we’re back where we started. ®

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