HP-EDS: It's About The Clouds, Baby!

36 Comments

Updated: With the Microsoft-Yahoo battle fading from the dynamic random memories of our over stimulated brains, it is time to turn our attention to Hewlett-Packard’s $12 billion $13.9 billion deal to acquire EDS, a services giant in its own right. The news was announced this morning. HP will purchase EDS at a price of $25 per share.

This indeed is the real thing: both companies have confirmed their talks and perhaps their seriousness. HP-EDS pairing will go down as one of the more significant developments of 2008, and its impact will be felt for years to come.

“I see it as an attempt by HP to really go head-to-head with IBM in a much more meaningful way, especially in technology services and IT outsourcing,” Dana Stiffler, research director at AMR Research told Computerworld. I think there is more to this deal than just old-fashioned outsourcing, and competing with IBM.

Typically, such a major deal means two things: Either the buyer has some issues with his current business, or he wants to make a big bet on the future. In case of HP CEO Mark Hurd, it might be a bit of both. There is only so much market share HP can carve out when it comes to printers and computers. More importantly, HP seems to be realizing that the future is about on-demand infrastructure. EDS brings to the table about 100 data centers around the planet.

Not everyone agrees with HP’s decision to buy EDS and get big fast. Forrester analyst Paul Roehrig is in that camp. Vinnie “Deal Architect” Mirchandani is someone I immensely respect and he brings up a very valid point when he writes:

But EDS is not Accenture or PwC (which IBM acquired) or TCS or Infosys. Its major strength is still in infrastructure outsourcing (though it has been growing its application and BPO capabilities nicely). HP’s outsourcing is similarly more skewed towards infrastructure. So, it is a scale play. But the timing is risky because infrastructure outsourcing is being challenged by data center consolidations, a secular decline in processing, storage and network charges and emergence of utility and cloud computing models.

However, I am taking a slightly more optimistic view of this deal, pointing out that this is HP’s bet on those very same trends — utility and cloud computing. HP might have finally realized that the future is about offering hardware as a service. Lets look at some of the recent developments

  • HP bought EYP Mission Critical Facilities. John McCain, senior vice president and general manager, HP Services, at the time of the deal remarked: “Acquiring EYP Mission Critical Facilities boosts HP’s ability to help customers transform their data centers and build dynamic computing environments from the ground up.” (via Rich Miller.)
  • HP bought Opsware, a data center automation software company started by Marc Andreessen, for $1.6 billion in July 2007.
  • In March 2008, HP announced its data center-as-a-service initiative, targeting large companies.
  • Yesterday, The Times of London reported that HP is close to buying 24 data centers currently owned by British Telecom in Europe for about $3 billion. The Times report says BT will provide Internet bandwidth, networks and remote access to HP, an area where the Silicon Valley-based giant isn’t that strong.

If you plot the EDS bid against these four recent developments, it is not that difficult to postulate that HP is building its own cloud focused on large global companies. Going further, I would channel something Vinnie says in his post.

HP’s hardware business has seen significant success in a number of emerging economies — running that infrastructure as a service does offer some unique opportunities.

I think this is a good point: Even though it’s growing fast, BRIC Bloc remains reticent to spend big dollars on infrastructure. Offering infrastructure-as-a-service to Indian telecoms or Chinese automakers of Brazilian biofuel companies is a much easier proposition then making them spend millions of dollars on blade servers, storage systems and networking devices.

Update#2: My favorite writer/thinker/troublemaker Nick Carr disagrees with me thesis about HP & the Cloud. He believes that this is a backward looking move:

an acquisition aimed at boosting profitability through consolidation and cost reduction in a mature business. The transition to the cloud will, for big companies, be a slow one, and there will continue to be much money made in running client-server infrastructures for many years.

Nick might be right, but in reality as he argues in his book, Big Switch (have you read it yet?), the world is going the way of the cloud, and even a company as stodgy as HP realizes that it has to transition to the future.

Update #3 Our colleagues over at OStatic, all of whom are open-source experts, have taken a deeper look at the deal as well. Go here for the full analysis.

What do you guys think?

36 Comments

P Koul

It is a very smart and future oriented move by HP which will yeild huge benefits in a slow release manner to the combined behemoth. I think given the mega size and mega real estate and Data Centres EDS owns,the deal appears a good bargain for HP. HP may now become a first among equals with IBM. I predict that some counter move from IBM can be expected sooner than later.

Om Malik

@ Jez

I think it wouldn’t surprise me if there is a HP-BT merger though I think it be a disaster. I think HP can buy BT’s outsourcing business in India, though I am not sure the British Government will approve the sale of telephone company.

@ All. My theory is that HP is trying to become the GE of Silicon Valley. Highly diversified and betting big on future technologies. Any thoughts?

Jez

I think your comment on the possible $3bn BT Data Center buy looks forward to something happening in a few more years… a BT & HP merger!

Wild?? maybe! but HP used to have BT provide only its european data networks.. with this acquisition, it will also provide Worldwide data networks.

Also go and look at the recent HP Datacenter consolidation from 85 worldwide datacenters into 6. For HP its about providing the servers/switches through the reseller channel, but some enterprise customers want to lose the responsibility of looking after there own IT. If HP Can put there OWN servers / switches in these new Datacenters ??

This looks like a good buy. More to it than meets the eye!

rohit

So why is Oracle missing out on all the Cloud fun? Who will they buy?

biny

wht will happen eds owned companies like Mphasis??how it will get affected?

Jose Miguel Cansado

In the long run Om is absolutely right and this acquisition reinforces a potential offering from HP for Cloud computing. In the short term, most business from EDS is outsourcing infrastructure and it will not change that quickly.

Emerson Takahashi

Om,

I don’t think HP was after some datacenter space. In 2006 they announced its intention to reduce from 85 datacenters to 6 . Unless they sold all the datacenters and are now regretting, HP was after some business to strenghten the holes in their offering.

But with the new paradigms, it’s hard to know HP’s intentions.

Pete Steege

Insightful Om. It makes a lot of sense. Makes HP look proactive. Consulting is so “2005” – it’s all about the cloud, baby.

Rick

Excellent analysis Om, right or wrong. I believe you may be right and you’re the only person I’ve seen address the cloud possibility here.

Satish Mummadi

Interesting article :-)
EDS acquisition also provides HP with a gazillion EDS consultants/BPO Services too (EDS bought Mphasis a while ago) & EDS has some good clients like BlueCross/GM which outsource a large chunk of IT services to EDS.

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