HP Hauls In EDS update from May 2008

Has HP hit the jackpot with its $13.9 billion EDS acquisition -- or has CEO Mark Hurd opened up a big can of worms?

Clearly looking to turn HPs services business into a cash cow a la IBM Global Services, Hurd threw open the coffers earlier this week, despite analyst concerns about EDS’s ongoing financial performance.

The outsourcing giant has not had the easiest time of it recently, taking a financial hit as users move away from mega-deals with a single vendor and even pull their servers and storage back in-house.

TBR analyst Lindy Hanson nonetheless thinks that Hurd knows exactly what he is doing -- and in her view, that has been evident since his appointment as CEO just over three years ago.

At that time, Hurd overhauled HP’s services business, she says, making tough decisions that meant a short-term revenue hit. “He got them out of deals that didn’t make sense to be in, and over time, HP services came back with a much stronger organization from a competitive standpoint,” explains the analyst. “You have to look at Hurd as someone who is not afraid to take a hit on the top line for its long-term potential.”HP may certainly find itself taking a short-term hit, if EDS’s recent financials are anything to go by, although this is clearly a calculated gamble on the part of Mark Hurd.

The biggest challenge for HP as it moves forward is a strategic one, according to TBR’s Hanson. “EDS makes HP look a little more like IBM Global Services, but the missing piece of the puzzle is a really strong consulting arm,” she says.

HP, of course, launched a failed bid to buy PwC’s consulting division in 2000, only to see arch-rival IBM walk off with the consulting arm for $3.5 billion a couple of years later.

The obvious candidate to fill this gap would be Accenture, although Hurd dodged a question on this topic during a conference call to discuss the EDS acquisition this morning. Asked why “EDS is a better fit than Accenture,” he replied, somewhat vaguely, that the EDS deal made sense “strategically” and “financially.”

This doesn’t mean that HP is unlikely to consider Accenture in the future, at least according to TBR’s Hanson.“If you combined EDS, HP, and Accenture, you would have a really strong powerhouse in the market,” she says.

For the time being, HP has its work cut out digesting EDS, but don’t bet against Hurd opening his checkbook again at some point in the future.

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