HP announced its largest acquisition since the company purchased Compaq, buying services and integration provider EDS for $13.9 billion. EDS, founded by former US presidential candidate Ross Perot, still manages about 200 HP 3000s, according to a CEO of a software company in the 3000 community. One community member who knows both EDS and HP from earlier times said the two firms are more alike today than they ever were in the 1970s and 1980s.
"The corporate cultures at HP and EDS were totally opposite in their treatment of employees [in the 1970’s]," said former OpenMPE director Paul Edwards, "when I was an employee of each company. HP has now the attitude toward their employees that EDS did back then. After watching my new DVD Origins from HP, which shows the way they valued employees and the HP Way, I really miss that environment."
Edwards sent us the message today from Dallas, which is the EDS headquarters city. He pointed out that EDS has been "a very IBM-oriented company." This might make an HP enterprise customer, mostly the ones who will stay with the vendor through their 3000 transition, wonder why HP wanted to spend so much for a consulting and integration company. The deal more than doubles HP's Services revenues; that sector billed $16.6 billion last year. EDS generated $22.1 billion in revenue in 2007 and has approximately 140,000 employees in 65 countries. HP's headcount has nearly doubled immediately to a total of 312,000, with more than half of its workers now dedicated to services.
The markets dealt out a sharp sell-off of HP stock in their immediate reaction. HP lost more market cap during the first 24 hours after the announcement than the total value of EDS.
Services is high profit, so much so that HP will create a separate EDS group as part of its strategy. The only HP businesses which generate more profits are systems and HP's ink sales. Services is long-term money, not the constant battle of printers and imaging or the tough sell and churn of enterprise servers and storage. Services is lucrative, which is why HP has been after this kind of company ever since the Compaq deal's ink was dry.
Not long after Carly Fiorina engineered that Compaq merger, fighting back half of HP's shareholders, her executives reached out for Price Waterhouse Cooper, the largest of all independent "C&I" firms, as they're called in the industry. The PWC deal didn't make it out of an HP boardroom vote, a harbinger of the dissent to come about HP's style of growth. At the time, the PWC deal was a $16 billion purchase. Since HP is getting EDS for $2 billion less, four years later, this is a much bigger value at a time when HP needs to maintain revenue growth.
Purchasing massive competitors is becoming a favorite HP strategy to grow. The Mercury Interactive purchase of 2006 clocked in at nearly $7 billion, and it was aimed at enterprise users, too. HP considers the services sector an important part of its enterprise strategy. This is clearly not a deal aimed at the PC buyers or customers who toss an ink cartridge into their grocery carts once a month. HP said of the purchase,
This acquisition fills out a part of our portfolio that we consider to be strategically important. This acquisition will strengthen our ability to compete in the important services segment. By using our technology to automate, we will be able to drive greater efficiencies for our customers on a global basis while expanding our offerings in key segments and extending our reach in important vertical industries.
HP has an extensive press kit on the deal, announced just two days before the company's Q2 report. Purchasing the number one services provider will make waves and perhaps tilt HP toward services as a hedge on printer and imaging revenues.