The Services: HP Buys EDS

There is an acquisition that happened this week, and the acquisition is the services: the HP that said on Tuesday it would buy Electronic Data Systems, the deal that is worth $25 per share and about $13.9 billion. The announcement came on May 13. The reports appeared the same day in the New York Times and on CNET. The acquisition is the May 2008 story, and the story is the lesson: the hardware that is commoditizing, the services that are where the money is, the industry that is being reshaped by the deal.

The Services is the subject of this article: the deal that HP announced on Tuesday, the pioneer that Ross Perot founded in 1962, and what it means for the industry in May 2008.

1. The Tuesday Announcement

The announcement is the news, and the news is the Tuesday: the HP that said on May 13 that it would acquire Electronic Data Systems, the price that was set at $25 per share, the total that came to about $13.9 billion, the services business that the deal was meant to boost. The announcement is the May 13 fact: the reports that ran in the New York Times and on CNET, the confirmation that came from the companies, the analysts who began the math, the industry that leaned forward. The announcement is the moment, and the moment was the beginning.

The announcement is also the scale: the biggest acquisition in the history of HP, the record that surpasses the Compaq purchase of 2002, the $13.9 billion that are committed, the 130,000 employees who will come with EDS, the services that are the reason for it all. The announcement is the Tuesday meaning: the hardware company that chose the services path, the pioneer that was bought, the number two ranking that will follow, the industry that watched the two giants come together. The announcement is the Hurd move, and the move was the statement: the cost cutter who bet on services.

2. The Company Ross Perot Built

The company is the history, and the history is the founder: the Electronic Data Systems that began in 1962, the Ross Perot who started it with $1,000, the idea that companies would pay someone else to run their computers, the industry that was invented in the process. The company is the pioneer: the first of the outsourcing firms, the model that others copied, the business of running corporate computer systems for a fee, the Fortune 500 customers and the governments that followed, the trust that was earned over the decades. The company is the 1962 origin, and the origin was the seed.

The company is also the scale of 2008: the 130,000 employees and more, the data centers that were operated, the help desks that were staffed, the corporate computer systems that were run for the Fortune 500 and for governments, the systems that keep the economy moving. The company is the EDS of today: the outsourcing contracts, the decades of experience, the customers who stayed, the operations that span the world, the name that still means outsourcing to the Fortune 500 and to governments. The company that Ross Perot built in 1962 was the prize, and the prize was the services.

3. The Services Pioneer

The pioneer is the position, and the position is the services: the EDS that ran the computers, that managed the networks, that staffed the help desks, that took the complexity off the customers' hands. The pioneer is the outsourcing wave: the companies that decided to hand their data centers to a specialist, the governments that did the same, the contracts that ran for years, the business that grew with every decade, the model that IBM would later perfect. The pioneer is the EDS story, and the story is the invention of an entire industry, the industry that HP is buying.

The pioneer is also the prize: the services that HP is buying, the 130,000 employees who come with the deal, the data centers and the help desks, the contracts that run for years, the systems of the Fortune 500 and the governments, the complexity that the customers handed over. The pioneer is the 2008 position: the company that Ross Perot started with $1,000 in 1962, the firm that pioneered the outsourcing business, the purchase that will make HP the number two in the world behind IBM. The pioneer is the target, and the target is the opportunity announced on Tuesday.

4. The HP Story Under Hurd

The story is the turnaround, and the turnaround is the CEO: the Mark Hurd who took charge of HP in 2005, the costs that were cut, the profits that grew, the PC and printer business that was disciplined into health, the growth that returned to the bottom line. The story is the Hurd method: the expenses that were trimmed, the operations that were tightened, the results that followed, the shareholders who were pleased, the analysts who were convinced, the company that was remade in three years. The story is the arc from 2005 to 2008, and the arc was the preparation.

The story is also the limit: the PCs that were commodity, the printers that were mature, the growth that had to come from somewhere else, the hardware that could no longer carry the company, the margins that kept on shrinking. The story is the Hurd answer: the services that were the industry's growth area, the IBM Global Services that was the model, the acquisition that would buy the growth outright, the EDS that would bring the scale, the number two that would follow. The HP story under Hurd was the preparation, and the preparation was the deal announced on Tuesday.

5. The Rationale: Hardware and Services

The rationale is the shift, and the shift is the economics: the hardware that is commoditizing, the printers and the PCs that are sold on price, the margins that shrink, the growth that fades, the cycle that never turns. The rationale is the services claim: the outsourcing that is where the money is, the contracts that run for years, the revenues that repeat, the profits that are more reliable than the box, the annuity that the hardware never was. The rationale is the industry truth of 2008, and the truth was the direction for the whole of the technology business.

The rationale is also the model: the IBM Global Services that showed the way, the services arm that made IBM the leader, the comparison that every hardware maker studied in the boardroom, the proof that services could carry a giant. The rationale is the Hurd logic: the services that are the growth area, the EDS that brings the scale, the combination that makes HP the number two in the world, the rank that sits behind IBM, the position that no one else can claim. The rationale was the argument, and the argument was the deal that HP announced on Tuesday.

6. The Number Two

The number is the ranking, and the ranking is the industry: the IT services market that IBM leads, the Global Services machine that sets the standard, the second place that HP will hold when the deal is done, the rank that comes with the EDS purchase. The number is the position: the second largest IT services company in the world, the scale that follows, the customers that can be pursued, the contracts that can be won, the IBM that must be chased. The number two is the May 2008 claim, and the claim was the ambition of the entire deal.

The number is also the challenge: the IBM that remains ahead, the services that are hard to run, the integration that must be managed, the cultures that must be merged without breaking the customers, the 130,000 people who must be kept in the fold. The number is the statement: the HP that is no longer just the hardware company, the services that are now the core, the rivalry with IBM that becomes the daily work, the comparison that will be made every quarter. The number two was the goal, and the goal was the strategy from the Tuesday announcement onward.

7. The Biggest Deal

The deal is the size, and the size is the record: the $25 per share, the $13.9 billion, the largest acquisition in the history of HP, the record that beats the Compaq purchase of about $25 billion in 2002, the biggest bet the company has placed. The deal is the scale: the 130,000 EDS employees who will join, the operations that will combine, the services business that will be boosted, the company that will be remade in a single stroke, the services that will carry the future. The deal is the May 2008 number, and the number was the commitment.

The deal is also the risk: the integration that must work, the customers who must stay, the employees who must be kept, the profits that must be delivered to the shareholders who approved the price, the promises that must be kept in the end. The deal is the Compaq lesson: the last big acquisition that took years to digest, the caution that the analysts repeat, the stakes that are higher now that the number is bigger, the memory of Compaq that will not fade. The biggest deal was the bet, and the bet was the future of the whole services business.

8. The Lesson for the Industry

The lesson is the direction, and the direction is the services: the hardware that is commoditizing, the services that are where the money is, the companies that are following the shift, the deals that will follow this one, the valuations that rise with the tide. The lesson is the May 2008 moment: the Tuesday announcement, the $13.9 billion, the number two ranking, the industry that is being reshaped by the largest acquisition HP has ever made, the services that have become the prize of the industry. The lesson is the economics, and the economics was the point of the entire transaction.

The lesson is also the method: the HP that bought the growth, that paid the premium, that bet the company on services, that followed the IBM model instead of fighting it, that chose the long contracts over the quick sales. The acquisition is the May 2008 story, and the story is the lesson: the pioneer that was purchased, the hardware that faded, the services that became the prize, the industry that will never be the same, the standard that was set this week. The services were the future, and the future was the deal announced on Tuesday of this week.

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