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HP raises stake in services market with $14B EDS purchase

Posted: 15 May 2008 ?? ?Print Version ?Bookmark and Share

Keywords:consulting industry? services market? HP acquisition?

Hewlett-Packard Co. is raising the stake in its battle for market share in the lucrative high-tech consulting and services industry with an agreement to pay almost $14 billion for rival Electronic Data Systems Corp.

The transaction is projected to more than double HP's revenue from services, according to a company statement, which further confirmed the company's intention to move beyond its hardware background into higher margin services and consulting operations.

"The combination of HP and EDS will create a leading force in global IT services," said Mark Hurd, chairman and CEO of HP, in the statement. "Together, we will be a stronger business partner, delivering customers the broadest, most competitive portfolio of products and services in the industry."

The acquisition of EDS, a $22 billion services company, would be HP's biggest since its purchase of Compaq Corp. under former chairman and CEO Carly Fiorina.

The latest move positions HP in a better competitive position against IBM and is the clearest sign the company aims to expand into services to compensate for challenges in its core but lower-margin hardware business.

Taking on IBM
HP has been trying with limited success to chip away at IBM's leadership in the services and consulting business. In its last fiscal year ended October 31, 2007, HP services reported revenue of $16.7 billion, up 7 percent from $15.6 billion in the prior year.

By contrast, IBM's services revenue for its last financial year was $54 billion, a 12 percent increase from $48 billion in the preceding year.

The acquisition of EDS is likely to make HP even more competitive in the high-tech consulting and services business, but the company is unlikely to catch up with IBM immediately or even in the next few years.

IBM has spent the last 5 to 10 years reorganizing its operations to emphasize services and has reduced its once massive dependence on hardware for a majority of its revenue and profits.

In the last fiscal year, for instance, the services business accounted for 55 percent of IBM's revenue of $99 billion compared with 16 percent for HP in its last fiscal year.

The two companies are jostling for leadership in the high-tech consulting and services business because margins for the segment are typically higher than in hardware, which is also prone to commoditization and supply chain management problems.

HP noted that the acquisition of EDS would help advance its "stated objective of strengthening its services business," through the provision of such services as IT outsourcing, including data center services, workplace services, networking services and managed security."

The transaction is expected to close in Q2. HP expects to retain the EDS brand and said the new division would continue to be led by current EDS chairman, president and CEO Ronald Rittenmeyer.

- Bolaji Ojo
EE Times

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