HP and EDS: The Customer Case

This entry is the second 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 on 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 the Perspective, “Acqusitions: 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.