Hewlett-Packard confirmed this week that the company is indeed in "advanced discussions" regarding a possible "business combination" between it and EDS.
Media reports said HP plans to pay between $12 billion to $13 billion for EDS, citing unnamed sources.
It was a bolt from the blue in the IT outsourcing industry, for sure. "Most large outsourcing firms have been unwilling to partner or have too many vested interests," Dean Davison, vice president of outsourcing advisory neoIT , told me after hearing the news. Davison predicts the deal will be a catalyst for more of the same, particularly among Tier 2 IT service providers. (Analysts have been predicting that 2008 will be a year of consolidation among outsourcers.)
Short-term stock market response was as expected: "yay" for EDS , "nay" for HP .
Some HP watchers wondered why the company would buy slow-growth EDS now. (The Dallas-based vendor's earnings growth has averaged around 2.8 percent)
But HP has the cash to make this happen and it's probably a good move, says Adam Strichman, CEO of Nautilus Advisors . NeoIT's Davison notes that HP management could be in a good position to help EDS return to growth mode. HP recently reorganized its own services business in what looks like a move to clear the decks for the EDS buy, says former EDS executive and current CEO of Everest Group Peter-Bendor Samuel, adding that HP can eliminate a lot of "EDS overhead."
Bulking up the services side would better HP's position against its bigger IT services brethren like IBM and Accenture . It could even enable HP to shed that darn printer business once and for all.
The combined company would become the largest desktop services company in the industry. And an HP-EDS could offer very attractive pricing updates for mainframe migration, says Davison.
Industry watchers don't expect the deal to go through until late in the fourth quarter, at the earliest. EDS clients will notice little change immediately. HP's current outsourcing clients should expect to be transferred to the EDS side of the house, since its IT services business far outweighs anything HP has built to date. (For more on what to do to protect yourself during vendor M&A activity, see Five Steps to Take If Your Outsourcing Service Provider Is Sold.)
Should the deal go through, the only real gap that would remain in Mark Hurd's burgeoning IT services portfolio would be in the management consulting department, according to Davison.
Watch out, Accenture. You could be next.
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