HP Agrees to Buy EDS

According to the Wall Street Journal, Hewlett Packard announced today that it will acquire IT services provider, EDS for $13.9 billion or $25 per share. The acquisition will double the size of HP’s own services business and is intended to position it more strongly against IBM. The move will vault HP into second place in market share for IT services, however even after the merger, IBM will maintain a roughly 2% market share advantage.

Early comments about the move highlight the cultural differences between the two companies. Interestingly, the announcement states that EDS will remain headquartered in Plano, Texas with the current CEO, Ron Rittenmeyer, reporting to HP CEO, Mark Hurd, rather than to HP’s head of services, Ann Livermore. This reporting structure may be intended to buy some time for determining how and how much to integrate the two service businesses.

Depending on which figures you look at, mergers of this type fail to achieve their intended goals between 70 and 85% of the time. The most often cited reason for this is failure to integrate the cultures. EDS was founded by the iconoclastic, hard charging entrepreneur, Ross Perot. He sold the company to GM in the 1980′s and took a seat on the GM board for a short time. He and Roger Smith could not see eye to eye however and he soon left. GM later spun off EDS. HP’s founding culture is famous for it’s collaboration, congeniality and grow leadership from within philosophy. The acquisition of Compaq in 2002 cost Carly Fiorina her job and has taken Mark Hurd several years to make work.

This acquisition will be a major test of executive leadership. It makes sense to try to achieve this kind of scale as global IT organizations outsource more of their operations. Organic growth, or multiple smaller acquisitions could take too long. On the other hand, it’s hard to imagine that EDS will remain a semi-autonomous unit of HP indefinitely. At some point, Hurd will want to integrate his two services units and at that stage the issue of culture will come to the forefront. The services business, is in some ways a new way to go to market for a hardware provider like HP. To make that work, however, there must be a customer philosophy that maintains a level of independence and objectivity about hardware recommendations. How hardware neutral EDS and hardware interested HP make this marriage work will be fascinating to watch.

Other Insights