Finally, the IT-services industry has its own big merger to boast! In the last three years, a lot of such potential deals have been speculated, including the possible private-equity buyout of ACS and CSC; acquisition of a part of CSC by HP; acquisition of Satyam by IBM; and acquisition of Capgemini by Infosys! But none of that eventually materialized.
The acquisition of EDS has been speculated internally in HP for a very long time, ever since HP started becoming serious about services. The Palo Alto-based company’s first strategy was to lure IBM employees to beef up its services business, which never really got off. HP then started getting EDS veterans to build its services business. The first big catch was Steve Smith, who joined the company in early 2005. Smith, who came from Lucent Technologies, worked in EDS for 16 years prior to that. When the company hired John McCain (no, not the presidential candidate) later that year to lead consulting business, under Smith, internal speculations strengthened that HP was probably trying to acquire EDS. McCain, like Smith did not come directly from EDS but from an offshore Business Process Outsourcing (BPO) firm iEnergizer, is actually, like Smith an EDS veteran of 16 years. From 2005 onwards, HP has added a lot of former EDS executives, at different levels. Notable among them include Mark Fulgham, the current Vice President of IT outsoucing.
When both Smith and McCain were there, speculations became rife that they were actually working to acquire a large company, with EDS being the front-runner. But Smith left in the end of 2006 because of “personal reasons,” and McCain was promoted to the post of Senior Vice President to Head HP services, which he presently does, reporting directly to Executive Vice President Ann Livermore. McCain, though an old EDS hand, is young and is extremely familiar and proactive with offshoring. So, many thought HP may eventually go for one/multiple smaller acquisition(s) in India rather than a large acquisition like that of EDS, till about a few days back when reports came in that HP and EDS were in merger talks.
The Equation
For HP, the choice was hard. It had to grow the services fast to be a sizable competition to IBM. The trade-offs were three: Size, quality/profitability, and cost of acquisition. Large Indian companies were clearly beyond its reach, and have never showed any inclination to get acquired. The tier-2 Indian companies, though far more profitable and modern in their outlook, were small and costlier. EDS was not only large, it came cheap, even with a 25 percent premium to its quoted stock price. As many analysts have rightly described it, it was a successful “bargain hunting.”
However, the value of the company is only a quarter of the story. Two bigger challenges remain.
Successful integration, like in any large merger, is a challenge, especially with companies with different cultures like HP and EDS. HP’s services offerings are far more sophisticated, high value, quality-driven tool-based (it is a leader in ITIL) and consulting-led — much like IBM, Accenture, and the Indian firms. EDS’ is the anti-thesis of that. Despite its breadth and the strength in details of execution, it has not kept pace with changing times. To marry the two cultures and hoping that the whole will be greater than the sum of the two will be a Herculean task. Many analysts have also pointed out that it is a distraction when HP was finally stabilizing. But Mark Hurd is the specialist in execution, as he has already proved. So that makes one hopeful.
The other challenge is EDS’ expensive manpower. One sizeable acquisition of Mphasis in India notwithstanding, most of the 140,000 employees of EDS are in the U.S. Compare that with IBM, which has more than one-third of its employees in India or Accenture, whose India manpower just surpassed its U.S. manpower. Or even present HP, which has more people in its services business in India than anywhere else, the BPO business virtually starting from India. John McCain, who’s sold on the idea of offshoring, will have to balance between the EDS integration — which will naturally come his way — and offshore ramp-up.
The other challenge, though not quite at the same level as the above two, is to decide whether to continue with the low-end BPO business of EDS, including that in the public sector, which none of the major outsourcing firms (other than EDS, CSC and ACS) target.
On the positive side, at least theoretically, it gives two advantages to HP. One, EDS is a huge channel for its big boxes, storage and all that big hardware to many traditional segments where EDS is strong. And two, it simply brings with it customers, many of which have not changed EDS as a provider considering the cost of switching but are not too happy with it either. HP can add a lot of value in those deals and make them long-term customers. You just have to ask Ralph Szygenda, Chief Information Officer of GM, to gauge what that could mean for him!
Last but not the least, it upsets the strong Dell-EDS partnerships which will hopefully be a boost for HP PC business. But the caveat there is that, if HP tries to do that, it will severely impact its reputation as a serious services player, as it will violate the first principle of outsourcing services.
Changing Outsourcing Provider Landscape?
Though most of the media and analysts have focused so much on this aspect, it is difficult to believe that HP-EDS combine will change the global services equation in any major way significantly. At least not in the immediate future.
On paper, it will create the No. 2 outsourcing player in terms of revenue. But it will not shift any boundaries. It will not affect IBM as the Big Blue’s new focus on strategic outsourcing has no threat from EDS. Ditto for Accenture. The rising Indian firms compete with different strengths of offshore execution and nimbleness, which they will continue to. If HP decides to pursue the public-sector business aggressively, it may affect the likes of CSC and ACS in the U.S. That is not exactly the sexiest outsourcing market!
In the long run though, it may create another major global player if HP manages to marry the complementary strengths successfully; if it manages to rationalize its onshore-offshore mix; and if it manages to turn EDS’ customers to long-term strategic clients for all its business. That is a lot of ifs.
