HP-EDS deal could spark M&As

In India and in the US, analysts expect the technology industry to trend toward consolidation, though the pace could be slower in the US as players like IBM and Accenture are in stronger positions

BANGALORE/BOSTON: Hewlett-Packard Co’s deal to buy Electronic Data Systems Corp is expected to spark a round of consolidation in the global technology outsourcing sector, as suddenly overshadowed rivals scramble to stay competitive.

Analysts said India’s Infosys Technologies Ltd, Tata Consultancy Services Ltd, Wipro Ltdand Cognizant Technology Solutions Corp may now be forced to look for acquisitions to compete with a combined HP and EDS, and boost flagging profit growth.

Meanwhile in the United States, analysts also expect the industry to trend toward consolidation though the pace could be slower as players like International Business Machines Corp and Accenture Ltd are in stronger positions.

“Businesses of companies like Infosys and Wipro are under pressure, as their rivals like IBM and Accenture have really learnt how to be competitive even in a sluggish economy,” said Avinash Vashistha, CEO of outsourcing consultancy Tholons.

“This merger, if it happens, will only make (the) situation worse for them by potentially creating a third competitor,” he said. “Now, it has become imperative for them to make acquisitions to fill the gap in their services portfolio and get a global footprint. If they don’t go for inorganic growth at this stage, they will clearly be at a competitive disadvantage.”

HP struck a deal to buy EDS for about US$12.6 billion, which would vault it to second place, behind IBM, in tech services — a sector that offers relatively stable income and high margins even in an economic downturn. EDS has some 27,000 workers in India after buying 62 per cent of MphasiS, a Bangalore-based IT outsourcing company, in 2006.

Prior to that EDS only had 3,000 workers in India.

IBM ON THE PROWL?

Together HP and EDS would have roughly US$39.4 billion in services revenue, compared with IBM’s US$54.1 billion last year.

“HP has really driven their stake into the ground saying they are going to be a major player for the large corporate clients around the world,” said Murray Beach, head of investment banking for TM Capital.

But Beach does not see IBM — which bulked up its services division in 2002 with the US$3.9 billion purchase of PwC Consulting — aggressively looking for acquisitions.

“I don’t see any reason why they will have to,” he said, noting that IBM already does a good job of using its services business to sell hardware and software, and remains in the No. 1 spot in the industry even after HP buys EDS.

Furthermore, the big Indian IT firms are not considered easy takeover candidates themselves. Wipro and Satyam are family controlled, while TCS is majority owned by the Tata family group and Infosys is controlled by a group of founders.

Yankee Group analyst Zeus Kerravala said the HP-EDS deal could spur some outside companies, such as network operators, to look for targets to expand into the consulting business.

He cited AT&T Inc, BT Group, France Telecom, NTT and Verizon Communications Inc as examples. “Looking at Accenture or CSC would make some sense” for those telecom companies, Kerravala said.

Worldwide computer services revenue rose 10.5 per cent to US$748 billion in 2007, according to market research firm Gartner Inc.

IBM was the leader with a 7.2 per cent market share, EDS weighed in at No. 2 with 3.0 per cent, while HP was fifth with a 2.2 per cent share.

“You will see this space consolidate. But they are not going to go out tomorrow and start merging with each other as a result of this deal,” said FBR analyst Matt McCormack.

CASH-RICH INDIAN COMPANIES

India’s cash-rich IT services firms have so far restricted themselves to smaller mergers as their businesses were growing rapidly organically and they were wary of integration risks.

But analysts say this may change soon as they look to add new service lines, strengthen marketing muscle and add large clients in new regions.

Last year, talk circulated that Infosys or smaller rival Wipro may bid for Europe’s biggest IT firm Capgemini, but all the companies denied the rumours.

“Indian firms may not be able to digest a large firm, but they are certainly focused on small- and mid-sized firms to gain access to some specific service lines, like consulting, where they have not been able to make a big mark,” Vashistha said.

“They have no chance to do that and compete with players like IBM, Accenture, and possibly combined HP and EDS, organically.” - Reuters