HP’s Purchase of EDS May Have Minimal Impact on Financial Services

In May, HP reached a definitive agreement to acquire Plano, Texas-based technology services and outsourcing provider EDS in a deal worth more than $13.9 million. While the move will create one of the world's largest services companies, its impact on the firms' financial services clients could be minimal, according to Adam Honore, senior analyst with Boston-based Aite Group.

The move definitely is a services play, Honore says -- "[HP] is trying to create another IBM," he explains. "That is clearly the goal."

According to HP's Bob Pryor, SVP, worldwide sales - outsourcing services, the combined company would create a services entity that would be second globally only to Armonk, N.Y.-based IBM in size. "The company would have a greater scale advantage to offer customers a broader set of products and services," he says.

But Aite's Honore isn't ready to declare the deal a game-changer for either vendor's financial services clients just yet. "I'm not sure how much of an impact on financial services this acquisition will have," he notes. Compared with HP, "EDS has a small footprint in financial services. HP definitely has a presence there. But the cross-synergies of this deal don't seem particularly strong. It's not like HP is buying a company whose bench is deep in financial services. But now they'll be able to put a lot more bodies on a problem."

EDS' current menu of financial services offerings includes applications development and modernization, card services, lending services and call center services.

Cathie Lesjak, CFO with Palo Alto, Calif.-based HP, says the acquisition will help the company expand its service offerings, including IT outsourcing, application outsourcing and business process outsourcing. It also will help extend HP's reach in key verticals -- including financial services. "EDS customers will have access to a broad set of technology solutions delivered by a leader in innovation and operational execution," Lesjak comments. "HP customers will benefit from EDS's broad geographic and vertical reach, and deep expertise in IT and application outsourcing."

HP's Pryor adds that financial services is a critical vertical for the company. "We look at key verticals as very important sources of our current business and in our long-term growth plans," he says. "Scale is a major lever in terms of driving value."

Although there are some overlapping products and services between the two companies, Lesjak notes, they are complementary. Obvious synergies include cost savings from corporate shared services. "Opportunities for cost reductions exist in the overhead cost structure [such as IT and real estate] and economies of scale in procurement," she says. "Revenue opportunities exist with the ability to sell across the existing portfolio and improved account, geographic and vertical coverage."

Moving Against the Grain

Aite's Honore argues that the deal is curious in that HP, by acquiring another domestic company, is moving contrary to the larger industry trend of growing through international acquisition. "Most companies would evaluate the overseas outsourcing option from a cost management perspective," he contends. "HP is going against this trend."

The deal is expected to close early in the second half of the year. EDS will retain its moniker but will be labeled "an HP company" and will become an operating group within the HP organization. EDS will maintain its current headquarters in Plano, and EDS chairman, president and CEO Ronald Rittenmeyer will continue to lead the company. He will join HP's executive council and report to Mark Hurd, HP's chairman and CEO.