23-HP and EDS: The Product 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 5/27/08

This entry is the first 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 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 Product Case

Combining these two companies is an important, but not the final, step toward answering the product needs of HP in the marketplace. The combination of the two product lines is positive since the two current lines are complementary. EDS covers more of the services business than does HP. EDS offers many services, including running mainframe systems, help desks and managing billing and payroll systems. The HP services business is more attuned to supporting its hardware product sales. It is best known for managing infrastructure, such as server systems.

The bad news is that both HP and EDS are losing market share in the computer services industry. The industry is growing at 8-10% a year. Both HP and EDS have slower growth rates. Both companies suffer from some kind of performance problem, i.e., the Functionality, Reliability or Convenience of the product purchase. (See the Perspective “How Customers Buy” in the Tools/Perspectives section of StrategyStreet.) The combined company will have to overcome these market weaknesses to become a star performer.

IBM, the market leader, offers Functionality that the combined company does not offer today. IBM offers a broader array of business consulting skills than either HP or EDS possess. IBM uses these superior consulting skills to create capabilities that are unique in the marketplace. And because these skills are unique, they command a price premium. This price premium explains at least part of the differences in the operating profits of IBM compared to its peers in services.

This combination certainly increases the product portfolio of both companies. In order to round out that portfolio, another acquisition involving a company or companies that have broader business consulting skills is necessary and likely.

In our next blog entry on this merger, we will talk about the combined company’s prospects for customer acquisition.

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Update 2022:

HP’s attack on IBM by way of acquisition failed to produce a unique product to entice many new customers to HP’s portfolio.  It did help the company remain in the game as a significant player.

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.

We believe that customers buy according to a hierarchy of needs. There are four of these needs and customers review supplier offerings in an order we call the Customer Buying Hierarchy. HERE is a short video describing the Customer Buying Hierarchy.  To review how to segment your customers by need, go HERE. On this page you can use our many segmentation concepts and examples to brainstorm improvements for your own company.

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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. These are Next Leader Transformer competitors.

The three Transformer 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 innovations create wide moats.

IBM and HP, erstwhile industry leaders, failed their market by sticking with proprietary hardware and matched software. While they held this position, 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 shares of the market. (For a similar story with a different ending see our Blog 12-Google versus Microsoft in the Office).

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