Prize Catch or Head-Scratcher?: HP offer to EDS.

This week’s blog is just continuation of last week’s story of mergers and acquisitions. But EDS and HP deal is more of global in nature.

When Hewlett-Packard announced its $13.9 billion acquisition of tech services giant Electronic Data Systems on May 13, pundits heralded it as a bold move by HP CEO Mark Hurd. In one stroke, it seemed, he had put HP on a stronger footing with market leader IBM in the fiercely competitive tech services business. Together, HP and EDS will create a services giant with $38 billion in revenues, compared with IBM's $54 billion.

Yet a closer look at the deal raises questions about Hurd's strategy and choice of dance partner. EDS, pioneered the practice of taking over corporations' computing operations, was slow to respond in the early 2000s to the threat of nimble Indian rivals offering services at sharply lower prices. Revenues stagnated, and EDS racked up huge losses. Eventually, the company increased its overseas hiring, and bought control of an Indian company, MphasiS. (I wrote in my blog about this merger of EDS and Mphasis as how it makes sense and which was eventually figured in Rediff)

So this deal may not change the game when it comes to one of the most important factors in tech services. The top-tier services companies need large, low-cost, global workforces, and their operations need to be tightly integrated so employees with diverse skills collaborate smoothly. IBM, Accenture, and Indian companies such as TCS, Infosys and Wipro lead in this effort, while EDS and HP have lagged. The services sector is going through a shift, and this merger doesn't address the global service-delivery challenges that HP faces.

For Hurd, the logic is simple. He prizes EDS's giant outsourcing business because it has a large number of customers producing annuity-style revenues. There isn't much overlap between the companies. And he says there will be considerable cost savings. EDS CEO Ronald Rittenmeyer will run the services subsidiary.

Hurd, who excels at cost-cutting, had a choice between buying a big racehorse seemingly past its prime or a young colt with lots of potential. He bought the mature horse. Now we'll see if he can whip EDS back into shape.

Aztechsoft acquisition: Is this start of consolidation?

This week’s news that caught my thinking is Mindtree’s acquisition of Aztechsoft. On paper, it looks like a good deal in terms of money Mindtree will spend to acquire. Also, from strategic point of view, it might help Mindtree to gain that extra mile it wanted. Analysts believe, this is merger of synergies.

It is true, Mindtree has a target of meeting 1 billion in revenue and it wanted a portfolio in product development area. Off course this acquisition serves that purpose.

Since I am a small time investor in Mindtree, I would naturally want their top line to grow. But, the question that came to my mind is; is this start of consolidation in Mid-tier services companies in IT sector?

With rupee appreciation, challenging global conditions, stiff competition from global companies; are few points why doing business looks difficult for mid/small companies. I am not entirely ruling out a possibility of running the business in spite of these conditions. But the overall condition seems to be real challenging.

This kind of consolidation is quite natural and it is phenomenon across all industries. I remember my MBA professor telling about “Rule of consolidation”. It seems, in all the sectors, the consolidation happens and 3 or 4 big players will control the entire business there after. I remember him quoting American Airline Industry, American Retail industry, American Pharmacy industry. And surprisingly this rules sounds sense!

Off course I am not of the opinion that there will be only 3 or 4 companies in IT sector. But, the question I am raising is, is this beginning of consolidation? Where slightly bigger player will acquire smaller companies? Or is it just one-of-those cases?

I believe, we need to watch this mid-tier sector very closely and I am sure there will be surprises! Who knows?