Now that Microsoft has withdrawn the $40 plus billion offer to buy Yahoo, we hear about another acquisition in the tech space. HP is supposedly in talks to buy EDS for about $13 billion. EDS shares jumped 28% to give it a market capitalization of over $12 billion today. On the face of it (and assuming that HP actually consummates the deal without much prolonged proxy battle), this is a great coup for HP and its chief, Mark Hurd. HP has been slowly gaining on IBM but has been lagging in the services segment. In fact, HP's services was mostly wrapping services around its products--far different from global IT services companies such as IBM, Accenture, Tata Consulting Services, Infosys and Wipro.
How should we think about this corporate combination? If it is purely gaining scale on the established model of outsourcing, this may not do much for HP. The domestic, local outsourcing model (i.e., shifting employees to service providers to reap benefits of specialization and economies of scale) is giving way to delivering services on a global footprint. Local outsourcing model is too expensive and the corporate buyers know it too well.
So, this is more than gaining high-margin customers that EDS currently service. What Mark Hurd needs to do is to use this acquisition such that HP + EDS becomes a leading global IT services player. I was half-expecting EDS to be acquired by TCS, Infosys or Wipro to expand their traditional Indian roots. But they do not have the same level of market capitalization as HP. Infosys and Wipro are capitalized at around $25 B and @20 B respectively. Now that HP (capitalized around $115 B) seems to be closing in on the deal, it will be interesting to see if the combined entity simply continues the old outsourcing model or whether Hurd is able to innovate a new form of global services that combines different types of skills and competencies on a global basis. Given Hurd's penchant for ruthless efficiency, I expect this to be driving HP's globalization plans.
Hurd seems to be remaking HP the way Lou Gerstner transformed IBM in the 1990s.