Wednesday, August 27, 2008

HP doubles down on services

On Tuesday, HP closed its $14 billion acquisition of EDS (Electronic Data Systems), the former powerhouse of IT services founded by Ross Perot. The acquisition is the 2nd largest for HP, after its $20 billion purchase of Compaq in 2002. (Ex-Merc report John Paczkowski makes a snide comparison on the WSJ blogsite).

The Merc reports that HP had 172,000 employees and has added 140,000 EDS employees. An unspecified number of the latter will be axed when CEO Mark “Mr. Efficiency” Hurd makes his Sept. 15 analyst presentation.

However, I have to quibble with one adjective in the report:

The massive deal, which HP says will expand its business in the lucrative field of technology consulting and outsourcing services, is the company's biggest acquisition since HP bought Compaq for nearly $20 billion in 2002.
HP had profits of $7.3b on revenues of $104.3b, or a net after margin of 6.97%. EDS had net income of $0.7b on revenues of $22.1b, or a net after margin of of 3.2%.

Services are high growth, but they’re not high margin. They may even become a commodity as services expertise becomes more widely dispersed.

The oft-drawn parallels to IBM are apt: IBM has also bet heavily on services, and HP is following them to the promised land (or over the cliff).

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