Can HP teach an Old Dog New Tricks?

Can HP teach an Old Dog New Tricks?
By Stephen A. Rutan

Hewlett-Packard has announced its acquisition of Electronic Data Systems, the technology services company that was started by H. Ross Perot in 1962. A May 26th BusinessWeek article explains the acquisition pros and cons and summarizes the market response to the deal. The combined revenues of HP and EDS would make them a significant challenger (in terms of revenue) to market leader IBM. Critics of the deal believe that HP should have made a bolder move to acquire a smaller, more nimble player in the tech services area that had a more aggressive posture in working worldwide. EDS' history indicated that they were slow to adopt the low-cost global workforce strategy that enables the giants in this industry to provide services at competitive costs. On the plus side, they have made significant strides since 2005 to catch up in this area. They have added tens of thousands of employees outside of the U.S. and intend to continue this trend.

Of course, all of these opinions on the deal result ultimately in "the market reaction", which in this case was a two-day, 5% decline in share price when acquisition news leaked out.

What can we learn from this incident and what can we expect moving forward? First, the disapproval of the market as indicated by the two-day stock decline will ultimately be nothing more than a fleeting hiccup for the deal. The two companies involved have tremendous financial and human resources and the ultimate success of the deal will depend on how well they integrate the two businesses to succeed or fail in becoming a potent rival to IBM and other global services corporations. Second, the deal involves two large companies with substantial inertia (existing viable business models) and momentum (their current trajectory for change) -- and both of these factors will allow the parties a certain amount of time to make the project successful. Both HP and EDS have proud histories of excellence and are equipped with the personnel and market power to make good things happen. The true test of the wisdom of this deal will be seen after these two teams come together and try to make the integrated company a market leader.

We readers know that the business media is compelled to comment provocatively on any activity among the Fortune 500. We certainly could expect that the superficial criticism of the deal, had HP pursued a smaller, more agile player, might have been that they did not go after a big enough company with a substantial market footprint -- and probably would have suggested EDS (even with its perceived flaws) as the more tenable market move. Such is the nature of armchair quarterbacking these major market mergers. I am betting that the management teams at HP and EDS will realize the benefits of merging their companies and that this particular combination will be viewed favorably in the next two to three years.

How can we learn from this particular acquisition example? For small to mid-sized businesses considering acquisitions, it is not always about finding the perfect market fit -- and the luxury enjoyed by privately or closely-held small to mid-sized business is that they do not need to please the marketplace. The success of any acquisition is ultimately driven by the determination of the parties involved to make it work for their strategic vision. Yes, your next acquisition should look right according to your long-term intentions for the business. Yes, your next acquisition should withstand the careful scrutiny of your due diligence process. The important thing to keep in mind, as we will observe if the HP-EDS marriage makes it past the altar, is that success ultimately depends on whether you are completely committed to the work that will be required after the papers are signed and the deal is complete.

Stephen A. Rutan is a Senior Consultant with Center for Simplified Strategic Planning, Inc. He can be reached by email at:

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