HP's $13.9B Power Play
HP is set to acquire EDS for $25 per share in cash, giving the latter's shareholders a nice start to the week. EDS's share price jumped 28 percent Monday afternoon to end the day at $24.13, and stands at $24.44, up 36 cents, or 1.5 percent, this morning.
It's a monster deal for the IT sector. And if the deal closes, as HP hopes it will in the second half of the year, and the resulting company does not completely implode, it will also have an impact on the telecom sector.
That's because IT services are becoming an increasingly important part of large carriers' and vendors' offerings as they seek to strike multiyear outsourcing and managed services deals with multinational companies and service providers.
The growing importance of services capabilities was shown again Monday when Alcatel-Lucent (NYSE: ALU) announced it was forming a joint venture with Indian carrier Reliance Communications Ltd. (RCom) . (See AlcaLu, Reliance Form Joint Venture.)
HP wants to be a much bigger player in the IT services market, which is led by IBM Corp. (NYSE: IBM), and the EDS deal would more than double its business in that sector. In 2007, HP generated services revenues of $16.6 billion, while the two companies combined boast fiscal 2007 services sales of more than $38 billion.
That's still smaller than IBM, which generated IT services revenues of $54 billion last year, notes the analyst team at Ovum Ltd. , but a combined HP/EDS would be the clear No. 2 in the market and would "in theory be able to deliver greater global reach and economies of scale than either firm separately."
Combined, HP and EDS would have 210,000 services staff active in 80 countries, according to HP, meaning the merger would require a major integration effort.
"Ultimately, whether IBM, Accenture, CSC, and Capgemini need fear the outcome of this potential deal would rest on the success or otherwise of what would undoubtedly be a very ambitious corporate integration project. On paper an HP-EDS combination looks workable. But in practice it could prove anything but," states the Ovum team in its research note on the deal.
Impact on telecoms
If the deal gets completed, though, the impact on telecom will mainly be around HP's status as a partner. The greater firepower and extended geographic reach of a combined HP/EDS should make it an even more useful collaborator for telecom companies that have network assets and the know-how to run major wide area networks.
HP's news will be particularly important for major carriers, especially BT Group plc (NYSE: BT; London: BTA), which has been building its Global Services business based on a combination of networking and IT capabilities for the past six years.
BT and HP have a "preferred partner" alliance, and that relationship has resulted in a number of major contract wins for the pair. (See BT, HP Get Closer and BT, HP Strike Oil, BT, HP Win Anglo Deal, and BT, HP Win Deal.)
But the EDS acquisition would also give HP a better chance of becoming a significant supplier to major telcos. Combined, the companies will have greater resources and reach, and be able to piece together more competitive outsourcing bids, an area where EDS is already active, having landed part of a major global outsourcing deal from Vodafone Group plc (NYSE: VOD). (See IBM, EDS Share Vodafone Spoils.)
HP is also an important marketing and development partner for a wide range of vendors. (See HP Resells Sylantro, HP OEMs CVidya, Huawei, HP Team Up, HP, Tandberg Team, and HP, Intel Test IPTV.)
And, of course, HP is more than a services firm. It is one of the leading players in the OSS and service delivery platform (SDP) markets, it supplies vital back office systems to mobile operators, and it has developed its own alternative to AdvancedTCA (ATCA) equipment. (See HP Ditches ATCA, HP Tackles Roaming Fraud, HP Unveils Mobile Solutions, HP Enhances Its OSS, HP Launches SDP , Vodafone Picks HP, HP's OSS Deployed in Denmark, Report: HP Tops OSS, HP Revamps for Convergence, HP, Telcordia Hop SDP Bandwagon, and HP Tackles IMS.)
— Ray Le Maistre, International News Editor, Light Reading