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.