24-HP and EDS: The Customer Case
This entry is the second in our series of four entries on the HP/EDS deal.
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.
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 SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile. We put their facts into frameworks applicable to all industries and found patterns. Strategystreet.com describes the inductive results of these thousands of observations and their patterns.