HP and EDS - What’s The Deal?

by Sachin Balagopalan on May 14, 2008 · Comments

Quite a bit of reaction on the blogosphere in response to news of HP’s huge purchase. Most of the pundits and bloggers are speculating on the obvious i.e IBM. Om Malik says …

“I see it as an attempt by HP to really go head-to-head with IBM in a much more meaningful way, especially in technology services and IT outsourcing…”

and Vinnie “deal architect” Mirchandani says it’s a scale play, HP is simply extending it’s infrastructure outsourcing business by purchasing EDS whose bread and butter is infrastructure.

But EDS is not Accenture or PwC (which IBM acquired) or TCS or Infosys. Its major strength is still in infrastructure outsourcing (though it has been growing its application and BPO capabilities nicely). HP’s outsourcing is similarly more skewed towards infrastructure. So, it is a scale play. But the timing is risky because infrastructure outsourcing is being challenged by data center consolidations, a secular decline in processing, storage and network charges and emergence of utility and cloud computing models.

Vinnie’s point is well taken in that infrastructure outsourcing has pretty much reached the top of the bell curve and is at the point of diminishing returns. Data centers are being rolled up and newer models like cloud computing are on the horizon.

Buying an Indian company like Satyam or Cognizant may have been a better strategy if indeed they want to compete with IBM. IBM’s Global Services has a huge footprint in India - more than 50% of the IT services marketshare. Rising costs and taxes not withstanding, India is still the number one country when it comes to outsourcing albeit South America and Eastern Europe are catching up. Buying an existing player in that space and location would most likely work better than EDS IMO. In any event I think the biggest differentiator is middleware. IBM is not just a services company but a software company as well with more than 20% annual revenue from its software group. This is huge and IMO unless HP makes some serious investments in this area they’re not going to have a chance competing with IBM.

At $13.9 billion the opportunity cost is huge and it’ll be quite interesting to see how this one pans out. Even more interesting will be how IBM responds to this. I wouldn’t be surprised if they make a play for one of the Indian outsourcing companies.


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