HP to buy EDS for $13.9 billion

Hewlett-Packard (HP) will buy the US-based Electronic Data Systems (EDS) by paying $13.90 billion, or $25 a share. Mphasis, which provides information technology solutions and business process outsourcing, is 61 per cent owned by EDS.

The Plano, Texas-based company (including MphasiS) employs more than 27,000, whereas HP India has an employee base exceeding 29,000. The acquisition was approved by the boards of the two companies.

"It is too early to speculate on the direct impact of such an event on EDS' subsidiaries. The subsidiaries are key components of our strategy and sales and delivery system,'' a company statement said. From an Indian standpoint, the deal will help HP to gain a foot-hold in the outsourcing services business.

Allie Young, VP and analyst, IT research and advisory company Gartner said, "As MphasiS comes with the EDS acquisition, it is a huge opportunity for HP to expand its position in India and globally, especially since it is making a huge effort to grow its services business."

The acquisition would be a wake-up call for Indian IT services, according to analysts. In terms of market share, EDS is next to IBM with a share of 3 per cent and HP occupies the fifth position with 2.3 per cent. 
 

Worldwide IT services vendors by revenue
Company	2006 Market Share (%)	Growth (%)
IBM	7.1	12.2
EDS	3.2	3.4
Accenture	2.5	19.7
Fujitsu	2.6	3.9
HP	2.4	8.1
CSC	2.2	7.7
Others	79.9	10.7
Total market	100	10.5

EDS has nine centres in India, located in Bangalore, Chennai, Pune, Mumbai and Delhi. HP India's services revenue from outsourced IT services were around $150 million or 6 per cent in 2006-07 and $16.6 billion in 2007. The EDS buy is expected to double the services revenues.

The transaction is expected to close in the second half of calendar year 2008. The companies' services businesses had annual revenues of more than $38 billion and 2,10,000 employees across 80 countries at the end of FY2007.

With the HP-EDS acquisition, the Indian IT cos' margins will come under pressure as they will find it tough to get the deals, according to analysts.

"There is a pretty strong demand for work to be outsourced to Indian IT vendors. However, with this acquisition, the top three global players""IBM, Accenture and HP-EDS will pocket the larger deals, whereas Indian companies will have to do with smaller deal sizes," said Avinash Vashishta, CEO, Tholsons Advisory.

With the EDS acquisition, HP joins the likes of IBM and Accenture that are eyeing the global IT outsourcing pie. It will also take on bigger deals from the domestic market.

"IBM and Accenture are already performing better in terms of showing higher growth and winning new and larger deals. The Indian IT companies were expected to grow at the rate of 25-30 per cent for the last quarter, but they have not performed. On the other hand, IBM and Accenture were supposed to clock growth rates of 20 per cent, but have done 2-3 per cent better", Vashishta added.

Indian IT companies have created a niche for themselves in the IT services and solutions market, but have not been very aggressive about the infrastructure aspects.

"The IBM-Bharti deal had a sizeable infrastructure component. Since IBM has experience in such deals, it had an edge over others," said an analyst who wished not to be quoted.

"The acquisition is certainly a positive for India. However, it will take a while to figure out how the Mphasis operations would be integrated," opined Siddarth Pai, Partner TPI.