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| HP Acquisition of EDS Creates Formidable Bidder |  |
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| by Mickey McCarter |
| Wednesday, 21 May 2008 |
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The combined company would become a very tough competitor for homeland security contracts, especially to IBM, analysts say HP, headquartered in Palo Alto, Calif., announced May 13 that it would buy EDS, based in Plano, Texas, for $13.9 billion. HP, with a business geared largely toward hardware and software offerings, would gain a strong footing in consultancy services in its purchase of EDS, which analysts expect to close by the end of 2008. "I'm sure HP is going to look to leveraging the relationships that EDS has," stated Morningstar stock analyst Rick Hanna. "EDS is a partner to homeland security. I would imagine that HP would look to cross-sell its products like PCs, servers and software. That seems to me to be the immediate area HP would want to focus on. They would want to nurture those government relationships and make sure they do well, and then as opportunities come up, they would bid on those with the increased scale. "They may be better positioned to compete versus the likes of IBM or traditional systems integrators like Northrop Grumman or Lockheed Martin," Hanna added. The US Department of Homeland Security (DHS) was IBM Corp.'s top customer last year, confirmed INPUT senior manager Ashlea Higgs. A great deal of that revenue came from IBM's Customs Modernization contract with US Customs and Border Protection. The combined HP-EDS company would emerge as a formidable competitor to IBM's homeland security market share, although they do not currently hold many sizable homeland security contracts. HP had less than $2 million in prime contracts with DHS last year, Higgs noted, while EDS had about $53 million--an insignificant amount for the company's $22.1 billion in total revenue for 2007. EDS's homeland security revenue is growing by leaps and bounds, however, as it just won a DHS data center contract worth up to $800 million. Via EDS contracts like the data center, HP could strengthen its position by introducing its hardware and software into those projects, Higgs observed. In so doing, it would be well positioned to go after state and local fusion center contracts and intelligence management projects. "The two of them combined will be on DHS's top IT contract vehicles," Higgs remarked. "EDS is one of the top three vendors on EAGLE [Enterprise Acquisition Gateway for Leading Edge Solutions], and HP works as a subcontractor on the First Source contract. So as a combination, as they have both contract vehicles covered." But while EDS is certainly poised to compete with IBM in commercial markets, homeland security government markets could actually prove more competitive, Higgs cautioned, with companies such as Unisys, SAIC, Northrop Grumman, General Dynamics and Accenture in the mix. Dana Stiffler, research director at AMR Research Inc., was quick to point out significant differences between HP-EDS and Accenture in particular. "I don't see the combined entity going up against Accenture as much," Stiffler predicted. "Accenture's emphasis has always been much more on the front end of consulting and implementation aspects of things and less on huge infrastructure-based contracts. There are certainly cases where EDS and Accenture go head-to-head, but I think the combined company would be more of a competitor to IBM. They still have CSC to contend with in the mix as well." In recent years, Accenture has beefed up its public sector practice, nabbing large contracts such as US-VISIT, Stiffler said. Accenture focuses a lot on "front end" work shaping overall strategy for its clients and working on the implementation of their programs, while HP and IBM traditionally offer client-led IT infrastructure services where the companies do the heavy lifting work on the "back end." Interestingly, IBM has two service branches--Global Business Services and Global Technology Services. IBM Global Business Services strives to be the business-facing component of the overall company while Global Technology Services generally takes care of support functions, Stiffler said. The combined HP-EDS company would look a lot like IBM Global Technology Services, she added. Morningstar's Hanna concluded that HP should still give IBM "a run for its money" in the long term, perhaps after a 12-18 month integration period. "Assuming HP can integrate these businesses well and so on, it could be a nice long-term positive for them but they have this near-term period where they have to integrate and execute. The good news is that they have someone like CEO Mark Hurd, who is adept at doing that. He has proven himself to focus on the details of running the business. That gives them a higher likelihood of being able to successfully integrate EDS," Hanna said. |
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