HP Snaps Up EDS for a Bargain

On Sept 11th 2007, in the article "Which IT outsourcing stock is the best," I had mentioned that Infosys (INFY), TCS and other big Indian IT companies can use their cash and raise debt to acquire companies like Electronic Data Systems (EDS).

It makes a lot of sense for HP (HPQ) as well to acquire a company like EDS, primarily to boost its own services and technology consultancy business. Since the acquisition isn’t at a huge premium to the prevailing price, it will provide significant synergies without hurting the balance sheet (HP has over $11 billion CASH on its balance sheet). A $23 billion revenue company pruchased at about $13 billion is quite a bargain, if not a steal. If HP can manage more cost cuts by leveraging its offshore base while keeping the EDS clients happy post-acquisition, then it can even help its bottom line to a great extent.

In the services space, IBM (IBM) will soon be "Hurd"led over with HP fast closing in.

Comments

[mltxus:]

"A $23 billion revenue company pruchased at about $13 billion is quite a bargain, if not a steal."

Are you serious?? Concentrate on the growth potential and profit margins of the EDS business model and you might change your opinion a bit.

2008 May 14 09:39 AM

[count_zero:]

I was part of the IBM HQ-area Services organization for some (too many) years. Anyone who can provide true value for the technology services dollar/euro can take a slice from IBM's pie as they certainly cannot do it, From an inside viewpoint it is an absurdly managed free-for-all of commissioned sales persons still hanging to the skirts of the big iron. Go for it Mr. Hurd.

2008 May 14 10:16 AM

[chowderhead:]

The price IBM paid for PwC was a 'deal'. EDS is not when its approximately 50% of revenue and gross margins that are poor.

First the quality of the buy. We have to remember that EDS is not a tier-1 consulting company. They are frequently left out of many of the Global 1000's RFPs for strategic transformation projects. That said, Deliotte or Accenture would have been a better buy if HP could afford it and had a strong services strategy.

Next, cost controls. I am sure you can 'cut' heads and costs but I am also sure that Ron Rittenmeyer has been slashing for some years to meet his financial goals and thus stock price. So, I would say that cuts will be done, but limited to pruning and effectiveness unless EDS dips into short term thinking and slashes away their future.

Lastly, I question the deal's longevity to HP's bottom line. EDS doesn't have the strength and breadth to compete with IBM and the tier-1 consulting companies. EDS merged with an even poorer HP Services team move the needle anywhere other than increase its size.

You can pretty the monkey and balance sheets up for the next 2-3 yrs through cuts and usage of HP vs. Sun hardware, but it remains to be seen how much of a consulting force this marrige will make in the market.

2008 May 14 12:53 PM

[p. smith:]

As I always said.... two losers don't make a winner.... this applys to msft and yhoo too.

2008 May 15 11:23 AM