After Buying EDS, Will HP Lose Focus?

Competitors, internal conflicts may cost the computer giant.

Although HP just plunked down $13.9 billion for EDS to expand in outsourcing and services business it may be some time before the computer giant sees results from the merger.

The deal creates a megafirm with $38 billion in combined revenues and 210,000 employees across more than 80 countries. Already, executives are hinting at layoffs to come, which will intensify the infighting and power struggles common in mergers and takeovers.

HP says the transaction is expected to close in the second half of this year, and will more than double HP's services revenue over the 2007 figure of $16.6 billion. The time lag, and the infighting, will slow down HP's drive to expand its services arm; meanwhile, both U.S.-based and Indian IT outsourcing and services companies are expected to begin a wave of mergers and acquisitions to take on the new giant in the industry.

The integration of HP (NASDAQ:HPQ) and EDS (NASDAQ:EDS) will be a "medium-term project", Ben Pring, research vice president for Gartner's IT services business, told

Although HP has made a "smart" decision in keeping EDS as a separate business for now, competitors such as IBM and Accenture "will argue that the HP-EDS executives will take their eye off the marketplace and focus on the power struggles in the business," Pring said.

Several factors militate against HP realizing any gains from the EDS purchase any time soon: History -- the track record of professional business integrations is "not great" Pring said; the scale of the deal, which is "unprecedented"; and the need to establish a proper framework -- "they'll be focused on internal issues for a number of years," Pring said.

Shareholders Are Not on board?

The market thinks HP overpaid for EDS, which has not been a stellar performer of late; first-quarter profits for EDS showed a 62 percent drop. When word of the deal emerged, HP shares plummeted while EDS shares rose, and both are among the NASDAQ's most actively traded shares today.

At 4 p.m. Eastern time, EDS stock was up 26 cents, or 1.08 percent, to $24.34, and more than 153 million of its shares had been traded, compared to an average volume of 3.6 million shares. HP stocks were down $2.56 or almost 5.5 percent, to $44.27, with more than 141.5 million shares traded, compared to the average volume of 15.2 million shares.

HP led the list of stocks falling on unusual volume.

In an attempt to defuse the market's negative reaction to the deal, HP released "preliminary" second-quarter results that were better than expected. Whether or not this succeeds in calming the market's concerns remains to be seen. If it fails, HP faces a rocky road ahead.

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