24-HP and EDS: The Customer Case

Two strong industry leaders, both highly successful in other markets, decide to combine their subsidiaries in one market in order to gain market share and improve economies of scale. This made some good sense a few years ago. It didn’t turn out quite the way they hoped, though. We cover the story and four separate blogs, numbers 23 – 26.

Posted 5/29/08

This entry is the second in our series of four entries on the HP/EDS deal.

The Setting

Hewlett Packard has proposed a take-over of EDS, in order to improve its services, revenues and profits. EDS is #2 to IBM in the computer services industry. Hewlett Packard is #5. The combined company, at $38 billion in revenues, would have only a 5% share of the market. IBM has $54 billion in services revenues and 7% market share. The reaction in the stock market has been mixed. Hewlett Packard stockholders don’t like it. Its share price fell. The EDS shareholders like it a lot better, as their shares increased in value.

A company undertakes an acquisition to achieve one or more of these three objectives: first, acquire a product that it does not have; second, acquire customers that it otherwise could not service; and third, establish a new lower unit cost through the combination of the two companies. We will look at each of these, in turn, in the current HP and EDS deal and then summarize our conclusions in the last entry.

The Customer Case

It is likely that this combination will improve the customer base for the combined company. Since the products are complementary, it is likely that the buyers of those products are complementary as well. Both current companies would thus have access to new sets of customers.

In addition, the combined company will appeal to more customers than either of the former companies in their stand-alone state because the combination is able to offer a broader product line to those sets of customers who need those broader services. The new company comes closer to a one-stop shop.

You might ask yourself whether the stronger company could not win customers away from the weaker company, rather than having one buy the other. That is unlikely. Even at the relatively high annual growth rates in the market of 8-10%, it is becoming increasingly difficult for companies to gain a great deal of market share by taking customers away from competition. A good acquisition, on the other hand, does shift customers. (See “Acquisitions: The Buy or Win Decision” in StrategyStreet.com/Tools/Perspectives.)

In our next blog entry on this merger, we will talk about the cost driver behind this combination.

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Update 2022:

HP’s attempt to gain a customer base through an acquisition of EDS had some success. While the combination was supposed to yield a market share of 5%, HPE held 4% of the market, just short of the second ranking in the industry, in 2016. It was unable to retain all the customers it had acquired. But, it did improve its market position.

Born out of HP’s split, HPE focuses on enterprise products and services. Hewlett Packard Enterprise (HPE) was created in 2015 when HP split its operation into two. On one side is HP Inc, the printer and PC arm of the company, while HPE deals with enterprise products and services.

As of early 2022, DXC Technology, which contains much of the old EDS, had sales of $4 billion, down 11.6% from the previous quarter. The company was operating at a net loss. At the same time, IBM reported quarterly sales of $16.7 billion, an increase of 6.5%. IBM was profitable.

In 2016, IBM held 7% of the IT services business, excluding consulting and business process outsourcing.  Accenture was second with 4% with HPE a close third at 4%.   In this fragmented market, the top ten competitors held only 30% of the market.  The industry leaders need to consider the qualifications for each of the roles customers use in this market. Go HERE to see more about customer roles and their typical requirements

Which customers matter most in a market? HERE are some thoughts about that question.

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Update 9/25

The 2025 computer services business includes three key services: the provision of IT infrastructure, managed as well as cloud services and consulting. The three leading market share holders: AWS from Amazon (30% share), Azure from Microsoft (20% share) and Google cloud 13% share). Together, they hold 63% of the industry’s market share. Other competitors hold low single-digit shares.

These three leaders completely reimagined the computer services business. The original business leaders, IBM and HP, were selling their own hardware and the proprietary software that accompanied the hardware. They were superseded by today’s leaders who innovated with cloud computing (a Function), digital transformation (a Function) and pay-as-you-go (Price) tech models.

The three leaders have developed extensive networks of global data centers for cloud computing, specialized cloud utilization products and advanced machine learning toolkits. These Function innovations offered turnkey solutions and rapid scalability to all customers (Function and Convenience). These three companies are Next Leader Transformer competitors.

 

IBM and HP, erstwhile industry leaders, failed their market by sticking with proprietary hardware and matched software. While they held this strategy, demand shifted to new Function benefits including the cloud, open-source platforms and integration flexibility customers slowly migrated away from HP and IBM. They each now hold a single digit share of the market. (For a similar story with a different ending see our Blog 12-Google versus Microsoft in the Office).

The leaders of the industry seem to have reached a high level of penetration of the Very Large and Large customers. These customers view their computer services providers as strategic partners. These partnerships focus on broader business goals rather than straightforward costs. Once a supplier establishes such a customer relationship that relationship becomes extremely difficult to flip to another supplier. Hence, volatility in the market is low with these customers. In search of continued growth the industry leaders are now adapting their products to serve the Medium and Small customers.

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