By contrast, even though it is regarded as a fading force with weak growth, EDS (EDS) occupies the number two position quite a way behind IBM in revenues. HP will not leapfrog IBM by acquiring EDS, it will simply assume 2nd place, but even so, it will be snapping at the heals of IBM.

As a company, HP is already larger than IBM by a few billion in terms of revenue. IBM’s revenues are just under $100bn and HP’s are higher by $5bn. The acquisition of EDS would alter that figure considerably, pushing HP revenues to $125bn. From that perspective it looks impressive, but take another look. As of May 13th EDS’s market cap is $12.28bn. Add that to HP’s ($108.89bn) and you get $121.17bn, which is not much more than two thirds of IBM’s market cap (172.19bn).

Clearly HP will needs to do more than “business as usual” with EDS, if it is going to impress the market. So what might that be?

Synergies and Strategic Wins

Here’s a list of areas and activities where HP could profit from the EDS acquisition:

  • HP will be able to compete head-to-head with IBM Global Services, particularly in the outsourcing market.
  • HP will be in IBM’s face in many of IBM’s mainframe site, whose data centers EDS runs. This is going to help HP sell some of its enterprise software, from its portfolio of system management products through to its NeoView data warehousing capabilities.
  • Dell has a strong partnership with EDS and it will surely suffer because of this merger. HP will simply get all the associated server business. I’ve no idea how to estimate the size of this, but it’s not peanuts.
  • HP’s blades and server technology are aimed squarely at the large data center (click here for further details) and HP can look forward to a significant boost in those sales - through EDS.
  • The same can be said for client virtualization where EDS should spell opportunity for HP (see here and here for details.)
  • HP has recently established a very impressive internal data center capability of its own (click here for details), which it can surely enlarge to embrace and include much of EDS’s outsourcing business. (HP has dramatically reduced its own data center costs).
  • Industry trends are running in favor of outsourcing and managed service provision in many areas. HP can ride this trend.

In summary, the synergies abound for increased sales of HP hardware and software and HP has proved it can strip cost out of its own operation, so it ought to be able to do the same for EDS. And let’s not forget the fact that it’s primary goal will be to grow the combined consultancy operation.

The Bottom Line

The obvious question to ask here is: “Has Mark Hurd bitten off more than HP can chew?” My guess is that he probably hasn’t. If nothing else Mark Hurd is a gifted and focused manager. He doesn’t acquire companies as though he were collecting old masters for a fine art collection - there’s always a commercial plan.

Reports suggest that HP will establish an “EDS division” run by Ronald Rittenmeyer, the EDS CEO out of the current EDS HQ in Plano, Texas. It will have about 210,00 employees and initial revenues somewhere in the area of of $40bn. Some of the EDS outsourcing activity will probably be absorbed into the three large scale data centers that HP built in Austin TX, Houston TX and Atlanta GA, but HP will surely expand beyond this to establish similar large scale data centers around the world.

The bottom line is that you will see a double impact on HP from the merger; operational costs in outsourcing should diminish over time and sales should receive a boost. How fast will that occur? It’s anyone’s guess, but if HP isn’t able to demonstrate gains on both sides of the line within a year of completing the merger, then something is going wrong.

Disclosure: No positions