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HP And EDS: Why The Deal? Look To India And IBM

Tuesday, 13 May 2008 | 3:33 PM ET
HP Headquarters
HP Headquarters

There's been lots of speculation about why HP is willing to shell out nearly $14 billion for EDS when that company's shares have flat-lined recently. Why spend a 30 percent premium on an also-ran player in services and technology outsourcing?

The topline headline is that HP is trying to beef up its Services Group by acquiring EDS to better take on IBM and its services unit juggernaut. Which makes sense. HP gets about $17 billion from its Services Group against IBM's $54 billion. There's clearly market share to steal there if HP can come up with a way to steal it.

But there's another drama taking shape behind the scenes, and it all comes down to India. By acquiring EDS, HP gets its hands on EDS' 60 percent stake in mPhasiS, a significant India services and outsourcing company in Mumbai, with 27,000 workers and plans to add another 6,000 this year alone.

IBM has around 50,000 employees in the region; Accenture about 22,000. The EDS stake in mPhasiS could be the jewel in this deal getting little attention, and could also be the reason why IBM might be forced to do something dramatic--very dramatic--to protect its turf.

India shows huge potential, and it's a market owned by IBM, Accenture and Infosys . And with HP aggressively getting into an area so critical to IBM, IBM is going to have to answer. CEO Sam Palmisano isn't known for big-time acquisitions or bold maneuvers--unless you count his $3.5 billion take-out of PriceWaterhouseCoopers back in 2002.

But neither was Mark Hurd before the deal for EDS was announced. Several sources are telling me that Infosys would make a tempting target for IBM. Same goes for Wipro. Deals for those companies, with market caps of $25 billion and $19 billion respectively, would make the HP/EDS deal look like child's play. And could slam the door shut on HP even before it gets a chance to see whether its strategy could work.

It's going to come down to how big a threat IBM feels. In a region so important to its overall business. HP can afford to be creative since its Services Group still only accounts for 17 percent of revenue. Sometimes, it's easier being the challenger than the challenged. But IBM can wipe away all doubts with a swift stroke, a big check, and some aggressive thinking.

I think the HP deal only begins a new era in IT consolidation, particularly India; it hardly begins and ends with this deal.

IBM? Your move.

Questions? Comments? TechCheck@cnbc.com

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