Banking

Will HP repeat its history by buying EDS?

HP has announced a major purchase of EDS to make an impact in the field of services. Wait - didn't they run this play once before when they bought Compaq? Sure enough. Has HP learned from history or are they doomed again for the next few years?

HP made a lot of news the other day by announcing its purchase of EDS. This isn't the first time HP has gone on a buying spree to extend its business. Most of you probably remember HP's purchase of Compaq back in 2002. The question is whether HP has learned its lesson from history or whether it's doomed to repeat the same mistakes over again.

HP or IBM-wannabe?

The whole rationale for the purchase of EDS was so that HP could move more strongly into the IT Services sector, an area that IBM has built a lot of its business this century in. HP for a long long time has seemed to have an almost kind of IBM envy. Naturally every company wants to beat its competition, but with HP, there's a near obsession with becoming the largest computer company on the planet.

Which, matter of point, HP already is. HP revenues were $107 billion, beating IBM by over $6 billion. HP holds the lead in the blade market. It battles back and forth with Dell for the PC market, usually beating it. HP owns the printer market hands down. HP is and has been the new IBM for some time now.

It may be the case of just wanting to keep ahead and get further ahead, but by making the purchase, HP takes a big gamble of stumbling the way that it did with Compaq.

The conquest of Compaq

In September 2001, HP announced its deal to purchase Compaq, one of the largest PC makers at the time and the original successful PC-clone company. The strategy there was twofold. HP wanted to gain marketshare in the PC/server business, so what better way than to merge with one of your major competitors? At the same time, HP wanted to use Compaq's purchase of DEC in 1998 to give it some more advantages in the services field.

Unfortunately, the merger didn't wind up going as smoothly as HP had hoped. So badly in fact, that it was one of the key reasons why then-CEO Carly Fiorina was driven from power and the company was nearly lead to a breakup. You can see how badly it went from some of the headlines on News.com about HP since 2001:

  • Services, servers to challenge HP - By becoming a single company, Hewlett-Packard and Compaq hope to take on IBM and others in services, servers, software and storage.
  • HP-Compaq merger: Worth the wait? - Last Labor Day, Hewlett-Packard announced that it was buying rival Compaq Computer in a deal that Compaq CEO Michael Capellas said would "change the basis of competition in the industry." A year later, the jury is still out on whether he was right.
  • Hewlett abandons merger challenge - Walter Hewlett says he will not further contest the outcome of a March 19 shareholder vote on Hewlett-Packard's merger with Compaq Computer.
  • Fiorina fires back against charges - A day after responding to questions with a host of terse answers, Fiorina was more talkative, drawing analogies and making attorney Stephen Neal rephrase questions regarding the significance of reports in February and March that suggested HP would fail to hit its financial targets after merging with Compaq Computer.
  • Dell gains in servers at HP's expense - Hewlett-Packard and Compaq Computer have said that their proposed merger will strengthen both outfits, but for now the two seem to be losing ground to Dell Computer in key markets.
  • Trouble in HP's post-merger paradise - While still smiling in public, newlyweds Hewlett-Packard and Compaq Computer are having their first marital spats. Although the two companies spent thousands of hours and millions of dollars on coming up with a strategy to blend two competitors into one colossus, philosophical and cultural disputes have emerged.
  • Merrill Lynch to HP: Time for a breakup - Longtime Wall Street analyst Steven Milunovich is urging Hewlett-Packard's top management to split the company into two separate businesses.
  • Fiorina steps down at HP - HP's merger with Compaq Computer, which was spearheaded by Fiorina, has also been criticized. Although the merged company has managed to wring out costs by combining operations, it has lost marketshare in certain areas, according to analysts.

What's next?

When it was all said and done, everything turned out OK. HP now seems to be firing on all cylinders. And then they go and buy EDS. It will be interesting to see if HP has learned its lesson in acquiring and integrating companies or if HP is going to be in for a long painful few years trying to digest another major purchase.

13 comments
Joe Cement Mason
Joe Cement Mason

I don't know much about HP's business acumen. However, I do know that I'll never buy another HP product. The HP products I purchased in the past were cheaply made and didn't work properly. Contacting HP support was a waste of time as they were no help in making the products work as they should have. A company's products are no better than the support behind them. In HP's case, the support department was absolutely horrible. On a scale of 01 to 10 I would have to give HP's support department a 00.

JCitizen
JCitizen

a good move,if you don't spend too much money. It is just good capitalism; you get all their business too!

NickNielsen
NickNielsen

There's a major difference at HP: the CEO.

The Scummy One
The Scummy One

I believe these are different types of events. HP is purchasing EDS, yes, however the company is not supposed to fully integrate with HP as Compaq did. It will still be run by those that are running it, however, they will report to HP execs and follow their rule. If I was to speculate on the issue, I think that EDS is looking at some big cutbacks as well, HP seems to be quick at cutting staff for the last few years.

John Sheesley - TechRepublic Pro
John Sheesley - TechRepublic Pro

HP has made a huge splash in the press with the announcement of its purchase of EDS to move into the services field. Wait. HP did the same thing 7 years ago when it bought Compaq. Part of the reason for the purchase was to get DEC, which Compaq had bought for the services industry just 3 years before. http://blogs.techrepublic.com.com/classic-tech/?p=131 So - Is HP on the right track this time? Or are they into the same thing they got when they bought Compaq? Years of pain and then maybe success several years down the road.

JCitizen
JCitizen

hasn't been my experience at all, and I've maintained more than a thousand of them. Notice I didn't say worked on them; they rarely need it. Same with the Compaq products.

Mark Boz
Mark Boz

Key differences between Compaq & EDS 1) Compaq was a hardware company struggling to get into the profitable service sector and used DEC to establish it's "best-of-breed" call center and service culture. 2) EDS started as a consulting services company, mostly to Fortune 500 companies. HP now has the hardware, the customer service and this deal buys them the high-paying customers already in bed with EDS. I think this is a great move, and if it does emulate the IBM triage of money making via multiple hardware, software consulting and service channels, then this is a good thing as IBM has been posting excellent results despite the lame economy. HP still made my favorite mini-computers back in the day, they had the best compilers and raw performance. HP is an asset to America and the world and this move ensures continued success.

michael.kinney
michael.kinney

It might work well in the future, but not for a few years. EDS has been cutting staff slowly, off shoreing, and realigning contracts, but have lost alot of good people, and have become a "Body Shop" with little value added. There could be some synergy in the merger if they focus on providing complete systems. I beleive it will take a while for the cultures to merge, HP to realign EDS's business, to close EDS's existing contracts with DELL and others, and to consolidate. My guess is 3-5 years, and then many of EDS's contracts will be up for recompete. Several of EDS's major business will be in jepordy, as the future climate for government contracts will tighten with a new administration and GM will be looking at ways to cut due to cutback in new car purchasing. Looks like lots of layoffs to me.

svasani
svasani

HP now has an almost complete line of Infrastructure products. Infrastructure services is a major chunk of EDS' business. With this merger, delivery of its Infrastructure services will only become faster, more efficient and seamless at EDS.

Canuckster
Canuckster

Not that HP won't be able to integrate EDS, but rather it will be far from smooth. HP loves to out-source or off-shore as much of its operations as it possibly can. You don't have to pay american wages to get american sales. Check out where you PC, or laptop, or printer were made. Where is the tech center you get when you call for support? It will be interesting to see how HP can out-source or off-shore a consulting business.

jonybader
jonybader

HP is buying sales revenue with this transaction. The HP executives will receive large bonuses at the end of 2008 for increasing revenue. The EDS executives will get golden parachutes. The EDS business will decline slightly since some clients will want hardware/software-neutral consulting firms. EDS business will further decline as HP tries to make EDS more HP-centric. Both actions will result in serious layoffs of EDS workers. This is an oil and water formula that is not going to work.

VEH
VEH

Yup, they'll get those golden bonuses and parachutes all right. It seems like most business decisions these days are driven by the short term interests of the management. Take your $20 million, you can live on that with some discipline, and to hell with the company after that. Mergers of "equals" don't work well--ask DaimlerChrysler. Cultures are what they are because of the organic way companies grew, and people aren't interchangeable cogs that can be repurposed at will. Finally, once they outsource everyone, who's left to buy anything? Cut costs, reduce labor, but who's going to be able to buy your product since everyone's taking the same path???