HP deals with EDS

HP’s announcement that is buying EDS has been received poorly by the markets. HP’s stock is off 6% while IBM, the company who should be hurt by such a deal, has seen its stock rise. Many of the issues people have raised relate to the poor cultural fit plus the relatively poor margins and growth EDS has been generating in recent years. HP in return is arguing that EDS creates a platform for them to grow large parts of their existing business – an argument the market clearly isn’t buying. To me this deal says more about Mark Hurd than it does about anything else. It is hard to argue that he has done a poor job since taking over the helm at HP. The business is stronger by almost every measure. I think he sees EDS as a business he can work similar magic on. I’m pretty sure he sees opportunities to improve the margins as he has at HP and get growth by selling in to his installed HP base. In other words, having done a pretty good job of turning HP around, he now needs something new to challenge him and his team. EDS could well prove a very smart deal. His board has to hope that while he focuses on EDS, someone else is paying equal attention to HP, because you can be certain that the likes of IBM and Sun will see this as a great chance to go after HP’s customers.