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Hewlett Packard Sets its Sights on IBM

May 15th, 2008 | By Merryn Somerset Webb | Category: Stock Market Investing

This is the biggest IT services deal ever, said Gartner analyst Ben Pring. Computer-and-printer giant Hewlett Packard is buying EDS, which manages other firms’ computer systems and tasks such as order processing, for $14bn.

The deal would form the second-largest group in the lucrative but highly competitive IT services market and help HP mount an assault on IBM’s leadership in the sector. But HP’s shares fell by around 10% on the news.

Will the deal work?

HP boss Mark Hurd didn’t emphasise the “significant” cost savings, so investors concentrated on the fact that EDS is a relatively low-margin and low growth business, said Lex in the FT. But therein lies opportunity. HP is aiming to bulk up its small services business, especially in EDS’s top area of large IT outsourcing contracts, and HP has both the required capital and scope to take short-term losses in return for longer-term profits.

Hurd managed to give rival PC maker Compaq’s margins a significant boost when he inherited it after taking over from his ousted predecessor, said Rob Cox on Breakingviews.

Another potential difficulty is the likely culture clash. Poor integration management hit HP when Compaq was taken over, as Robert Cyran said on Breakingviews. “Whether HP can repeat the good parts of the Compaq acquisition” – the improved profitability in Hurd’s tenure – “without the bad remains to be seen.”

HP: 12m change –2%

EDS: 12m change –14%

Source: Hewlett Packard Sets its Sights on IBM


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By Merryn Somerset Webb

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Merryn Somerset WebbMerryn Somerset Webb is the editor of MoneyWeek. In 1998, Merryn became a financial writer for The Week. In 2000, when MoneyWeek was launched, she became editor. Merryn has recently published a book on personal finance for women, Love is Not Enough: The Smart Woman's Guide to Making (and Keeping) Money.

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Money Week

Money Week gives you intelligent and enjoyable commentary on the most important financial stories of the week, and tells you how to profit from them. We have a wide range of financial professionals who write regularly for us, come to our monthly "Roundtable" discussions, and who contribute their expertise to the ongoing MoneyWeek debates. We write articles that we would want to read ourselves.

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