Hard work ahead

Analysts see positives to HP/EDS deal, but challenges remain

Government contracting experts are voicing
approval of Hewlett-Packard Co.'s plan to buy
EDS Corp. for $13.9 billion and the effect the
deal will have on the federal
market. But, they note, some
pitfalls lie ahead.

Once completed in the second
half of the year, the acquisition
could more than double
HP's services revenue and
make the company the world's
second-largest supplier of
computers and information
technology after IBM Corp.

Purchasing EDS makes much more sense
than HP's purchase of Compaq in 2002, said
Bob Guerra, partner at business advisory
company Guerra Kiviat Inc. "HP said they
were buying Compaq because they wanted to
be in the services business, and [instead]
they bought this huge commodity PC distributor,"
he added.

"Unlike many purchases where there are
significant overlaps or questions whether
there is synergy or isn't synergy, in this particular
case there is a lot of potential," said
Warren Suss, president of Suss Consulting.
"HP has been trying for years to build up
their outsourcing business and their services
business. And likewise, EDS could use an
infusion of capital and some aggressive management
to help with their growth."

George Price, principal at investment
bank Stifel, Nicolaus and Co. Inc., said the
merger makes sense if HP wants to try
to emulate IBM. "But even with EDS, HP
is not going to quite be IBM. It's not going
to have all the software business and all
the hardware business that IBM has."

Integrating two companies with different
cultures and businesses won't be easy. "Over
the next couple of years,
it's going to be pretty
challenging for HP to
really integrate EDS,"
Price said. "I would not
in any way underestimate
how tough a job
that's going to be."

The merger also
might not help sales of
HP products to integrators and channel partners,
said Mark Amtower, of consulting firm
Amtower and Co.

"For the channel at large, I don't see this
[merger] improving HP's position to sell
products through other vendors, with the
exception of companies like CDW," Amtower
said.

Competitors such as Sun Microsystems
Inc. and Dell Inc. could argue that EDS will
effectively shut them out by favoring HP
products on large government contracts, he
said.

Analysts said the effects of the merger
won't fully be known until the two companies
combine their corporate cultures and eliminate
duplication of efforts and redundant
staffing.

It will take time to figure out how to
merge what HP and EDS do, said Scott
Lewis, president and chief executive officer
of PS Partnerships, which advises technology
companies on partnering opportunities. "It
will take a number of years for HP to know
what it has [acquired] and add additional
strategies."

"HP's consulting and integration teams will
remain separate, at least initially, from those
of EDS," said Phil Codling, principal
analyst at global advisory and
consulting firm Ovum, a unit of
the London-based Datamonitor
Group. As a first step, he said,
HP's outsourcing interests should
be merged into EDS.

Lewis said the merger shouldn't
hamper EDS' chances to win the
next round of the Navy Marine
Corps Intranet contract, the $9.2 billion Next
Generation Enterprise Network, due in 2010.
EDS won the multibillion-dollar NMCI contract
in October 2000.

The acquisition "makes it extremely difficult
for anybody to beat EDS on the NMCI
NGEN recompete," Guerra said. "With the
technical capability and prowess of HP
behind the support services of EDS, that's
going to be a really, really tough situation [for
competitors] to overcome."

Nevertheless, Guerra added, there will
be lots of suitors going after the lucrative
contract.

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