By Paula Rosenblum, Managing Partner
5/13/2008
Amid all the talk of Blockbuster threatening to buy Circuit City (not gonna go there today) comes a true blockbuster deal. Hewlett-Packard (HP) has announced its intention to buy Electronic Data Systems (EDS) for an all cash deal of $12.8 billion. While some of us may sit here and wonder just how HP managed to find that much cash just lying around, most of us will more likely wonder “what does this mean to me?”
We know what the deal means to HP. The company now gets to go toe-to-toe with IBM, whose Global Services division is the world’s largest. Lest we forget, IBM is coming off a year of record revenue, profit and cash. The company earned $7.18 per share, up 18% from the prior year. For its part, HP reported a strong fourth quarter EPS of $0.86, up from $0.68 a year ago. Much of HP’s revenue and earnings growth was attributed to software and services. Hardware, while ubiquitous and plentiful doesn’t have nearly the gross margin software and services provide. “Synergies” and head count reductions should allow significant accretive earnings for the combined entity.
But back to the salient question – what does this deal mean for retailers? Certainly there’s an advantage to “one-stop-shopping.” Competition can be healthy. But let’s take a look at the parts and pieces to see where retailers might gain value:
· In-Store Managed Services – Ironically, this deal comes at a time when retailers report a waning interest in managed services for their in-store hardware, software, networking and installation. RSR’s recently published report The Customer-Centric Store, highlights that even in the mid-market, retailers have settled into self-servicing their in-store systems. RSR believes the reason retailers are choosing to monitor their own store systems is purely one of cost. The cost of managed services is still just too high. We expect this deal to exert downward pricing pressures across the board, with companies like Fujitsu reaping the fruits of a more competitive marketplace.
· Data Center Management & Hosted Enterprise Applications - HP has been hard at work centralizing their own famously far-flung server environment (HP used to be one of the great proponents of distributed computing), and in the process has developed a lot of expertise managing environmentally “friendly” data centers (coincidentally, these efforts have been led within HP by by former retail CIO’s Randy Mott from Wal-Mart and Ron Griffins from Home Depot). EDS for their part have run large data centers for years, so data center management synergies are possible. Whether that benefits retailers is pure conjecture, although the vertical is “ripe” for change. RSR’s soon-to-be-published study on The Future Of Application Delivery in Retail reveals that retailers are examining how they delivery applications to their enterprises, and outsourced enterprise application services remains an option, though not their first or even second choices (those being: commercial application implementation and on-demand application delivery such as “software-as-a-service”).
· Hardware – Prices will continue to fall. IBM divested itself of its Personal Computing division, even as HP has become the number one provider of personal computers. Prices continue to fall across all hardware categories where IBM still plays, including servers, storage and POS devices. IBM remains the number one provider of POS hardware. We don’t expect this deal to change that landscape much. HP’s reach into the world of POS remains narrow, with a few high profile wins. But HP and Dell have already been disruptive enough in the world of POS. Margins are razor-thin.
· Outsourcing Services – We believe that the bloom is off the rose in outsourcing. While every company now outsources some of its IT and business process services (Indonesian help desks, anyone?) growth has leveled, as retailers recognize the challenge of communication half way round the world creates productivity losses that come close to offsetting cost reductions.
The Bottom Line
HP has had a pretty remarkable run since Mark Hurd took the helm, and retailers might have expected a harder push into their market given that Mr. Hurd is an alumnus of NCR. But it really hasn’t happened yet, and the EDS deal isn’t likely to change the picture much. Mr. Hurd has taken HP to the top of the PC business but it’s a hard lead to maintain, and dependent on the public’s acceptance of things outside of PC makers’ control (for example, popular acceptance of Microsoft’s Vista operating system). Some years ago, HP’s then-CEO Lew Platt once complained that the PC business is “like the fashion business, you start discounting as soon as the product is off the assembly line.” EDS’s “wheelhouse” is government contracts, and this deal would put HP into the ring with companies like Lockheed Martin and Boeing. This gives them another good revenue opportunity other than the mercurial PC business.
While we don’t see how this directly affects retailers, it does change the landscape, and might foretell of a more concerted push into retail. Competition is good - go HP.
|
