HP buys EDS to take on IBM

Hewlett-Packard (HP) and Electronic Data Systems Corporation (EDS), the Plano, TX-based service giant famous for being founded by former presidential candidate Ross Perot, and known in its early days for its military-like culture and strict dress code, announced today that HP will purchase the company for "an enterprise value of approximately $13.9 billion" (read the press release here). The deal has already been approved of by both companies' boards. Officially, the deal should be finalized some time in the second half of this year.

EDS stock has languished, and efforts to increase it value through cost cutting and revenue growth have not succeeded -- at least in terms of Wall Street. As EDS CEO Ron Rittenmeyer noted, "First and foremost, this is a great transaction for our stockholders, providing tremendous value in the form of a significant premium to our stock price."

For HP, the deal is about increasing its services business, in particular, adding more types of services and increasing its scale in order to take on the king of IT services, IBM.

Looking at what HP is buying

In its latest filings, a February quarterly and 2007 annual report (the EDS fiscal year ends 12/31/07; read it here) and its 10-K (read it here), EDS noted that:

• Its revenue was flat but income was up. 2007 revenue was $22.1 billion, up 4% from the $21.3 billion reported for 2006. How global is EDS? It reported that 48% of its income was from outside the US. It also said that $2.4 billion -- or about 11% of its annual revenue -- was from contracts with the US government (its biggest government deal is with the US Navy for an "end-to-end IT infrastructure on a seat management basis").
  
  As for income, the company noted that it made $716 in GAAP-adjusted profits for the year, well over the $470 million it reported in the previous year.
  
  The company noted that for the fourth quarter, it had signed $6.1 billion in contracts, down from $7.6 billion in the same quarter one year before. It did note that its "sales pipeline is up 10 percent versus the year-ago period."
  
  
• IBM is its top competitor. When discussing the competition, EDS identified IBM Global services as its top competitor in infrastructure and application services (HP was listed as 5th and 4th in those markets). Only in the business process outsourcing (BPO) market did IBM not make the No.1 spot (it was third; first was Accenture).
  
  
• It has lots of employees. As of 1/31/08, the company had 139,500 employees in the US and abroad.
  
  
• It offers many technical and business services. The company has three major service offering segments, with a variety of sub-groups in each. They are Infrastructure Services (server management, Web hosting, PC management, help desk, security, networking, etc.), Applications Services (development, management, modernization, integration, etc.), and Business Process Outsourcing Services (billing, HR, CRM, etc.).

In comparison, HP, based out of Palo Alto, CA, reported its latest annual revenue figure (from 1/31/08) of approximately $108 billion ($28.4 billion is from its printing group, or about 26% of its annual revenue). It says it has 170,00 employees across the globe. As for its major business units, the company breaks it out into seven segments. However, from a technology product and services standpoint, there are three to consider: The Personal Systems Group (PC, notebooks, etc.), the Imaging and Printing Group (printers, inks, etc.) and the Technology Services Group (TSG; hardware like servers and storage, as well as services). In reality, the TSG group is actually a combination of three business segments: Enterprise Storage and Servers, HP Services (HPS), and HP Software.

In terms of service group size, today's numbers are:

• IBM reported $98.8 billion in revenue for its last fiscal year, with 386,558 employees across the globe. Services accounts for 54% of its revenue (see this page; read the annual report PDF here). The actual total was $54.1 billion.
  
  
• HP noted that HPS generated $16.6 billion in fiscal 2007 (ending 10/31/07; 2007 10-K available here). That's about 15% of the company's revenue.
  
  
• EDS reports, as mentioned. $22.1 billion in overall revenue.

HP's stated reasoning for scooping up EDS

Why is HP spending the cash to buy EDS? The official party line is:

Acquiring EDS advances HP's stated objective of strengthening its services business. The specific service offerings delivered by the combined companies are: IT outsourcing, including data center services, workplace services, networking services and managed security; business process outsourcing, including health claims, financial processing, CRM and HR outsourcing; applications, including development, modernization and management; consulting and integration; and technology services. The combination will provide extensive experience in offering solutions to customers in the areas of government, healthcare, manufacturing, financial services, energy, transportation, communications, and consumer industries and retail.

What are the top benefits for HP in real world, non-PR speak terms?

• More business strategy consulting. HP has been primarily about delivering infrastructure services, while IBM delivers those types of services as well as more strategic business and technology guidance. The EDS acquisition will enable HP to compete for more high-level engagements.
  
  
• Scale to take on IBM. Adding the huge number of EDS staff, as well as its existing contracts with private and governmental agencies, will enable HP to go after more of the services pie.

A typical long, bumpy road ahead

The acquisition of EDS won't be smooth -- no acquisitions of this size are. And there is some interesting history for both companies in terms of acquisitions. For example, it's important to remember EDS was bought once before. General Motors (GM) acquired the company in 1984 and then regurgitated it in 1996. For HP, this will be its second biggest acquisition -- both were of Texas-based companies. Its largest acquisition was the 2001 purchase -- completed in 2002 -- of Houston-based, PC giant Compaq.

So what are the major challenges with regards to this deal? They are similar to most challenges faced by the merger of two multi-billion dollar companies with a somewhat overlapping product portfolio. Top issues include:

• A huge integration effort. Merging two large companies with long histories is not easy. Issues of corporate culture, services offered, and branding will be some of the top challenges. According to the release, the EDS brand will live on: "HP intends to establish a new business group, to be branded EDS – an HP company, which will be headquartered at EDS's existing executive offices in Plano, Texas."
  
  Most likely, EDS would constitute a fourth major HP group, subsuming HPS from the existing TSG segment. In turn, that group's virtual name would most likely be re-badged as something like the Enterprise Systems and Software Group.
  
  
• Job losses. A merger of this magnitude, which also involves some overlapping capabilities, will undoubtedly result in lost jobs, relocations, and inter-company competition for those that remain in place. The most likely candidates on the chopping block: EDS human resources, marketing, and other administrative positions.

By: Tom Rhinelander

Microsoft and RIM cosy up to take on iPhone

Microsoft Corporation and Canadian Research in Motion (RIM), the maker of the Blackberry line of phones and the software (see the product page here) that enable the devices to work with Microsoft Exchange servers (among other options), announced plans to integrate Blackberry devices with the Windows Live services (see the product page here). According to the two companies, by this summer, Blackberry users will be able to connect with Windows Live Hotmail and utilize Windows Live Messenger on their smart phones.

With Apple's iPhone version 2.0 software also coming this summer (set to be downloadable by all iPhone users by the end of June; see this previous post; see the product page here), this should amplify the battle between Blackberry users and iPhone users, who will soon have the ability to sync their phones with Exchange servers.

Blackberry + Exchange + Windows Live versus iPhone + IMAP + Exchange

Microsoft is becoming a sort of arms dealer in the smart phone race. It has its own Windows Mobile offerings (see the product page here), and supports Blackberrys as well as other phones. By licensing its ActiveSync technology to Apple, it has now enabled the iPhone maker to take a share of the enterprise phone market from its own Windows-powered phones, as well as RIM and other vendor devices.

While there are certainly other phone makers, such as Nokia (which still sells the most phones on a global basis), Samsung, and Motorola, and there are new software platforms emerging, such as Google's Linux-based Android (see the product page here), the public relations (PR) battle is being fought by two of the smaller device makers, RIM and Apple.

How will the PR battle lines be drawn? The debate between platforms -- Blackberry or iPhone -- that has and will continue to be waged online and at the enterprise (business, government, and other large organizaitons) watercooler comes down to:

• Primary interface. The Blackberry is all about the physical keyboard that enables typing of messages. With today's announcement of the Bold phone (read the release here), the company is also pushing its screen capability and related services -- like videos -- forward. For Apple, the iPhone is all about its touch interface. Without a physical keyboard, users type into a virtual keyboard for their messaging needs.
  
  
• Enterprise applicability. RIM and its Blackberry phones and software have been deeply embedded in the enterprise, thanks to its "push mail" and synchronization capabilities -- enabled with the licensing of the Blackberry Enterprise Server (see the product page here). The software allows Blackberrys to tie into a variety of communication platforms: Microsoft's Exchange, IBM's Lotus Domino, and even Novell's GroupWise messaging and calendaring software. In addition, since Blackberry's are available from a variety of global providers, the phones -- and therefore the solutions -- can be used across the planet.
  
  Apple's 2.0 iPhone software will add much needed Exchange support (notably, without the need to license a connectivity server), as well as features that many enterprises demand -- such as remote wiping of data on phones (e.g., if a phone is lost, IT can delete its contents remotely). Apple is also behind RIM in terms of getting the iPhone to global carriers, with limited distribution in many countries. For example, the only fully supported cellular provider in the US is AT&T (unlocked iPhones will work on other GSM networks, but Apple support and phone operation is questionable). For those in Canada, there is no official iPhone carrier even today.
  
  
• Device appeal. Apple's iPhone has garnered much more attention than the competition. Even today, with the release of the Bold Blackberry model, coverage of RIM is minimal -- or tiny, if compared to Apple's PR. In fact, Apple generates more PR on iPhone software and pricing announcements than other phone makers can generate with any new model. And with an expected new model of iPhone this summer, most likely supporting high-speed 3G networking and adding GPS capability, another avalanche of media and blogging coverage is certain.
  
  The key to the iPhone is its interface and its included applications -- the full touch screen and the integrated features, such as an extremely usable Web browser, its "visual" voice mail, an iPod for music and video, an iPhoto-lite photo application, and tailored Google mapping and YouTube software. With the release of the iPhone software development kit (SDK) and the 2.0 software, third-party software should spring up. It does have some glaring features absent, such as support for multimedia in text messaging (e.g., sending a photo taken with its camera in a text message).
  
  Blackberry models, on the other hand, have mostly been sold on one main capability -- relatively seamless connection to enterprise mail and the physical keyboard -- with some industrial design thrown in to entice new users and satiate existing ones (e.g., the Bold, the Curve, and the Pearl have all had slightly different form factors). Most of the phones have had GPS support for some time and also include a music and media player. Despite these advantages, there is very little PR generated about any Blackberry feature beyond email.

The Blackberry/iPhone virtual bloodbath

While most enterprise users and consumers will buy phones from companies other than RIM or Apple, a significant -- and influential -- group of users will debate the merits of the two platforms, with full scale arguments taking shape in the summer, with the release of iPhone 2.0 software and the RIM Bold and its Windows Live services.

We expect a massive PR battle to be waged publicly and with surrogates -- either those astroturfing (pretending to be third-parties) or those who are simply active proponents of one solution or the other. The key issues, from an IT perspective, will be:

• Apple's enterprise features. How easy will it be to sysc an iPhone with Exchange? What about support for Domino? Will the remote wipe features work? Will enterprises take advantage of the ability to write their own applications, despite concerns about how Apple might limit their hosting and distribution?
  
  Given the slow pace of enterprise adoption, it will take a long time -- most likely until the end of the year -- to see any large organization take the full iPhone plunge. Look for medium-size business experience as a short-term fix in terms of getting information of iPhone applicability to the enterprise.
  
  
• The non-server iPhone sync solution. With no need for an expensive middleware server like the Blackberry Enterprise Server, Apple has the opportunity to entice enterprise cusotmers who don't want to invest in the license and management of another server. It will be a harder sell for those companies who already have the server software and Blackberrys rolled out -- like any change in technology, shifting users form one platform to another is never an appealing prospect, as the logistics, the support training, and the user confusion add a tremendous cost to any migration.

At the every least, a low-cost integration effort, combined with user demand, will drive iPhone adoption in enterprises. But expect Blackberry supporters to circle the wagons. The debates will feel a lot like the Windows/Mac battles that were and are now starting to be waged once again within the enterprise. We don't expect Blackberrys to disappear in significant numbers in the short term, but we do expect to see them sharing the enterprise spotlight with a small but growing number of iPhones.

By: Tom Rhinelander