Hewlett-Packard late Monday confirmed reports that it is in talks to acquire systems integrator giant EDS in a bid to boost its fortunes in the global services arena.
The takeover of EDS, Plano, Tex. would drastically change the services landscape for HP and immediately make the combined company a formidable competitor against IBM in enterprise services. HP had 2007 revenues of just over $104 billion while EDS's fiscal 2007 revenues reached just over $22 billion.
But HP has struggled to compete against IBM in global services. For its first fiscal quarter ended January 31, HP generated $4.4 billion in revenue. IBM, meanwhile, reported services revenue for first quarter 2008 ending Mar. 31 of $14.6 billion.
"Without knowing the terms or details, I think I would be encouraged," said Dave Butler, president of Enterprise Computing Solutions, an HP enterprise solution provider in Mission Viejo, Calif. "When IBM bought Price Waterhouse Cooper a few years ago, it was a shot in the arm for professional services. Today, we see IBM out there promoting their strategic services. My hope is that this would be an accelerator for HP to get to the next level of services. HP has been pursuing this for years."
EDS did not return calls seeking comment. But in an interview with Everything Channel last month, EDS CEO Ron Rittenmeyer, when asked about acquisitions said that EDS would make selected ones this year. "We want to move up the value chain. We want to be a broader provider than we have been in the past," he said.
This should not result in more competition to the channel "assuming that HP can work out the channel issues," Butler said. "It's a mechanical issue if we get compensated fairly [for services]." The impact would vary according to market segmentation. "EDS could strengthen HP's position in large accounts. It doesn't need to be a threat to our business. It can be complimentary," Butler said. "We fit in with customers where the dollars and the size are not suitable for HP to work direct. And we do a lot of introducing HP services into our enterprise accounts."
HP's move to bolster its enterprise services business with a possible acquisition of EDS comes as the vendor is in the process of turning more of its midmarket services business over to solution providers. That strategy to move more midmarket customers over to solution providers could mesh well with a potential EDS acquisition that would strengthen HP in enterprise services.
HP said last month that it is about a third of the way toward its goal of migrating 750 midmarket direct maintenance contracts over to solution providers and expects to complete the transition by year's end.
Referred to internally as the Atlantic Project, the plan called for HP to turn over in excess of $25 million worth of HP direct maintenance contracts in midmarket accounts to the channel in hopes that solution providers could better serve the customers.
"Most of these customers' only relationship with HP was the maintenance contract," said Jo Ann Redding, vice president, HP services sales for channel partner accounts. She said that some of the customers were not really working with anyone as chosen partner.
"There was really not anyone selling to them," she said. "[By turning these accounts over to the channel] this will give us better coverage in products and solutions."
HP solution providers applauded the vendors midmarket services strategy.
"So far in the last four months we've seen about a 12 opportunities [maintenance contracts] come our way in excess of $1 million," said Marc Sarazin, executive vice president of sales and marketing at AdviseX Technologies, an HP solution provider in Independence, Ohio.
Sarazin added that he expects to get more maintenance contracts as the remaining two-thirds of the targeted midmarket accounts transition over to the channel.
HP may also be looking to acquire the British data centers of British Telecom in a deal worth 1.5 billion pounds, or just under $3 billion.
According to the London-based Times Online, HP would get 400 new staff, as well as an agreement under which BT would take on the management of HP's voice and data networks globally. This would expand a similar arrangement the two already have in Europe.
News of the EDS deal, which hit Wall Street towards the end of the trading day, sent HP's share prices down 5 percent to $46.65, while EDS' shares soared over 27 percent to reach $24.