Tuesday, May 13, 2008

HP buying EDS

To increase its services revenues, HP confirmed it is buying EDS for about $14 billion. They’ve been down this road before.

In the fall of 2000, CEO Carly Fiorina was going to spend $18 billion to buy PWC, but then gave up a few months because it was too expensive. After the end of the bubble, IBM bought PWC for $3.5 billion, and was almost immediately successful in making things work

Increased exposure to services was a major factor behind the 2002 Compaq acquisition that nearly destroyed HP and cost Fiorina her job. More recent analysis claims that the merger was a success, some of that with insiders arguing their case after Fiorina’s departure. (Whether the merger made sense or not, the process for making it work set a new standard for the rest of the industry to follow.)

As Business Week points out, EDS (like Compaq) has fallen far from its heyday. The company has been in serious trouble for nearly six years. In September 2002, it announced an earnings shortfall of 80%, prompting a strike price lawsuit after its stock lost two-thirds of its value and its credit rating approached junk bond status.

Now, the hometown paper writes:

For EDS, the deal represents a chance to cash in after years of cost cutting and reorganization failed to give the company's shares much of a lift.

For H-P, an acquisition would boost the company's ability to compete in the services area with rival IBM Corp.

And for EDS employees, the purchase almost certainly means at least some job cuts.
Peter Bendor-Samuel, founder of Everest Group, a Dallas consulting firm that helps companies do business with outsourcers such as EDS, said EDS is a mature company.

While the company is widely recognized for its expertise, chairman, president and chief executive Ron Rittenmeyer hasn't been able to boost the stock price, Mr. Bendor-Samuel said.

"Ron has been running the game plan to take costs out of EDS, but you can't cut your way to greatness, and quite frankly the stock has languished," he said.

"There's really nowhere for EDS to go," he added. "They can do minor acquisitions, but it's hard to see how that drives stock prices."
Mergers to increase scale are common in mature industries, although Fiorina (a modern-day Ahab) was obsessed with surpassing IBM’s scale in hardware and services. Mark Hurd seems to share those goals.

Under Fiorina and now Hurd, HP increasingly looks like a slow-growth commodity company that grows via acquisition rather than organic market creation. In that light (so to speak), the photonics summit that HP hosted Monday would be more about gaining licensing revenues for HP’s patents than enabling HP to differentiate its products through the use of photonics.

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