Could this be the end for bungling services giant EDS with HP signalling their intent to expand their services business by buying them?

HP’s $12.6 Billion offer at $25 a share represents a 32.5% premium on the current EDS stock price. Sources close to HP suggest it’s virtually a done-deal and if so, it would put HP just behind IBM for market share.

EDS has a reputation for failing to deliver and is seen as a cheap buy for HP, who’ve been very quiet on the aquisition front since buying Compaq some years ago.

Could HP pull off an integration of two very different cultures?

Market nervous at the prospect of an HP-EDS deal

The stock market’s not a big fan of super deals like this. While promising much, they rarely deliver and the resulting company’s whole is almost invariably less then the sum of its parts. But HP did do an excellent job of integrating Compaq, but took a while to do it. So what would it gain from EDS?

The services business is dogged by bureaucracy, inefficiency and failure. When you consider all they have to do is sell expertise and not products, its almost laughable that the biggest players fail to make more than 5 to 10% profit despite charging excessively large fees for their often questionable technical expertise.

For example, IBM, the world’s biggest services group, makes around 10% on its deals. EDS often ends up paying its lawyers more than it earns for its failed projects and only makes on average 6%. HP on the other hand, makes double that.

Only time will tell if this is a good move for HP. The services business is moving slowly to a web-based Software-as-a-Service (SaaS) model which reduces the expensive local hardware and resulting complexity their clients were forced to accept. Efficiency and innovation is the name of the game now.

Tinware, anyone?

The advantage to HP may be twofold. Firstly, most managed services deals nowadays usually include a substantial data centre hardware component. This high-density tinware replaces the antiquated local server farms which required expensive IT support staff.

The shift to centralised delivery generates considerable revenue for services companies. Clients often expect them to supply hardware to deliver their applications. HP will be able to capitalise from this by pushing its blade servers. IBM bolsters its own services revenue as it too is a major blade hardware supplier.

HP has a lot of storage and network expertise and the advantage over IBM, who often choose to hand this over to someone else, potentially adding management complexity.

Secondly, the HP-EDS deal gives access to a large European client-base likely to welcome HP’s somewhat more professional approach rather than the litigious and confrontational “you’ll have to pay us to go” EDS philosophy.

Can HP really play with the big boys in the Internet-based services world?

There’s no doubting HP’s ability to deliver certain applications to desktops. But the jury’s still out on whether it can offer a full service infrastructure model across a range of platforms.

Service delivery now the Internet’s upon us requires a lot more forward thinking than desktop service provision, which is more about “here and now”.

Let’s hope that HP has a little more vision than its most famous acquisition, Compaq. Those with long memories will remember that Compaq sold their search engine division, Alta Vista.

Maybe if HP still had access to this technology it may not have needed to sign its recent deal with Yahoo to provide search facilities!