Issue #0816/2 – As Hewlett-Packard announces Q2 growth of 11% over the same period of last year, news breaks that the cash-rich company is buying Global IT Services giant EDS for $25 per share, to make Hewlett-Packard not only the largest IT company in the world but also the largest Global IT Services company. What impact will this acquisition have on the industry and what implications does it have for the printer industry?
Costing Hewlett-Packard a mere $13.9bn, or about 13% of corporate revenue for FY07 and less than one-and-a-half times the company’s operating profit, the purchase is hardly stretching the company’s resources.
With revenue of $22.1bn (FY07) to add to the HP Services revenue of $16.6bn, in theory this creates a division of Hewlett-Packard bringing in revenue of $38.7bn – around 7% more than the revenue IBM achieved ($36.1bn) from its Global Technology Services division in FY07.
For Hewlett-Packard, this looks like a transaction to buy market share in the services market and to lock competitor hardware companies out of a significant portion of the enterprise environment – using profits drawn significantly from its Imaging and Printing Group (IPG).
Mark Hurd, Hewlett-Packard CEO says, “The combination of HP and EDS will create a leading force in global IT services. Together, we will be a stronger business partner, delivering customers the broadest, most competitive portfolio of products and services in the industry. This reinforces our commitment to help customers manage and transform their technology to achieve better results.”
There is absolutely no doubt that Hewlett-Packard is the best-placed company in the world to offer “the broadest … most competitive portfolio of products”. The company is market leader in both PCs and Printers, with virtually every other IT product under the sun included in its product portfolio – Servers, Disk Storage, BTO Software and Workstations. And, in almost all market segments, Hewlett-Packard is the market leader.
For EDS, CEO Ronald A. Rittenmeyer believes that $25 per share is a great deal for its shareholders, while benefiting customers and capitalising on the skills of two sets of employees.
He says, “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. It’s also beneficial to our customers, as the combination of our two global companies and the collective skills of our employees will drive innovation and enhance value for them in a wide range of industries.”
This merger/buyout is not seen as a positive for the corporate, enterprise environment in all circles though. Hewlett-Packard and EDS might see it as being the best thing since sliced bread for the world as a whole but that view is not shared universally.
One senior manager in the IT Services industry says, “It’s unbelievable. This means that No.4 is buying No.2 to become No.1. It will have a major impact on the current number one, IBM.
He goes on to say, “The current No.3, Fujitsu, is so far behind in terms of market share that it will polarise the market between the two giants and everyone else but, more than that, it also polarises the market between west and east – the US vs. Japan.”
And, to summarise, “This is an extraordinary position for the market to be in and is almost sure to drive further consolidation in the industry.”
Other reactions around the world include a belief that there will be massive job cuts, combined with a freeze or cut in pay for employees that survive the job cuts. Indeed, there is serious scepticism over the whole ‘HP Invents’ tag line, with a feeling that Hewlett-Packard is buying, not inventing (as witnessed by the number of acquisitions the company has made over the past couple of years), and needs to get back to the business of inventing.
Quite clearly, the merger has implications for IBM, the current market leader. The new company will be branded ‘EDS – an HP Company’, retaining the identity of both companies for the time-being. In time, no doubt the ‘EDS’ will dropped but not until the market has thoroughly come to terms with the merger, created a firm association between EDS and Hewlett-Packard and forgotten that at one time they were competitors.
For IBM, the cumulative revenue of EDS and HP Services initially displaces the market leader into second place but, experience from the Hewlett-Packard / Compaq merger would suggest that the ongoing revenue from the new EDS/HP company over the next couple of years might not match the current combined revenue. This could easily still place IBM in the market lead in 2009/2010, once the merger has completed and the new company gets to grip with merging functions, resources, services, skills and administration.
Longer term, the battle will be on to determine which of these giants can achieve that No.1 position.
Regarding the printer industry, as opposed to the IT services industry, the implications are huge.
First of all, EDS has partnered with both Xerox and IBM for printer hardware, with Xerox in particular enjoying a good and profitable relationship with EDS. This revenue source for Xerox will now dry up as EDS moves across to Hewlett-Packard hardware!! Xerox will now have to work hard to replace that lost revenue through an expansion of its own Services contracts. Perhaps this is where we should look first of all for further consolidation in the market? After all, Xerox is not averse to company acquisitions either.
Secondly, this gives Hewlett-Packard exclusive access to the whole of EDS’s existing customer base with the potential to wipe out the entire fleet of competitive printer hardware currently in use with those organisations. We can probably expect to see significant increases in shipments of laser printers by Hewlett-Packard as we move through the latter part of 2008 and into 2009. This, in turn, will also have a major impact on Hewlett-Packard’s sales of printer supplies over the coming years.
Thirdly, Hewlett-Packard’s dominance in the corporate, enterprise market severely challenges other manufacturer’s ability to access the corporate market place – even bearing in mind a difference between an IT services contract and fleet purchase. The old adage, “no one ever got fired for buying IBM”, could become ever more pertinent in relation to printers and Hewlett-Packard. Major companies potentially losing out could include: Brother; Kyocera; Lexmark; and Ricoh, as well as the aforementioned Xerox.
Could this be largely the result of two CEOs desiring to be in charge of the biggest IT organisation on earth?
For Mr Hurd, Hewlett-Packard is already the biggest IT company in the world, significantly larger than IBM (by about 25%) and is almost the size of Dell, Canon, Accenture and Cap Gemini put together! But, Hewlett-Packard does not lead in the IT services industry.
While Mr Rittenmeyer is actually giving up being in the top job of the number two player in the IT services industry, he is moving onto the executive council at the world’s largest IT company while still retaining his top job in a division of that company as it instantly becomes the market leader.
For a company that believes it has to be number one in an industry or market sector for it to be worth playing at all, a buyout by Hewlett-Packard of another significant player in the IT services industry was perhaps inevitable as the only means of achieving market leadership.
~End~
