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Dude, What about Dell? EDS Deal Puts HP on Collision Course with IBM

Posted May 13, 2008 10:03am EDT by Aaron Task in Investing, Computers, Venture Capital, M and A, IPOs, Information Technology
Related: HPQ, EDS, IBM, DELL, CSC

Putting itself on a collision course with IBM and confirming Monday's rumors, Hewlett-Packard announced Tuesday it is acquiring EDS for $25 share in cash, or $13.9 billion.

HP also released "preliminary" second-quarter results this morning that were better than expected, an attempt to preempt more of the negative reaction that greeted the rumors of an EDS deal yesterday.

The deal is obviously a big risk for Mark Hurd, who has won accolades from Wall Street for restoring HP's luster since taking over as CEO in 2005. Hurd's "honeymoon period" appears to have ended yesterday as HP shares tanked when word of the EDS deal surfaced.

Given the commoditization of hardware, moving into services is a sensible strategy. But the market thinks HP overpaid for EDS, a slow-growing services firm with much lower margins than IBM generates in the same business, as Henry Blodget argues.

My view is that HP is wise to make this move now, having cemented itself as the world's top PC seller and with a robust printing business, i.e., from a position of strength.

Wall Street would no doubt prefer a share buyback -- or a lower purchase price.  But if Hurd can successfully integrate EDS's businesses and double HP's services revenue as forecast, long-term shareholders will be rewarded.

Finally, HP's move is further confirmation of how PC hardware is becoming more of a slow growth, low-margin commodity business which raises the question: Dude, what about Dell?

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26 Comments

Yahoo! Finance User
Yahoo! Finance User - Thursday May 15, 2008 09:31PM EDT

Dell & Sun ... what would they name it - SELL?

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Monty
Monty - Sunday May 18, 2008 03:27PM EDT

I think you'll see HP's services business moved under EDS and run primarily by EDS. A large number of the current HP services leadership are ex-EDS. HP needs the capabilities. EDS needs the capital. Together they should compete more effectively. Margins should improve through the synergies. It'll be interesting to watch.

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Utah R
Utah R - Sunday May 18, 2008 04:36PM EDT

What Ever

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Stanley
Stanley - Monday May 19, 2008 03:54PM EDT

Quote: Dell & Sun ... what would they name it - SELL? DUN.

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Stanley
Stanley - Monday May 19, 2008 03:56PM EDT

Dell & Sun ... what would they name it - SELL? No, it would be: DUN

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KBWomen
KBWomen - Monday May 19, 2008 05:06PM EDT

Dell schmell... Go HP!

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