HP-EDS: It’s About The Clouds, Baby!

Updated: With the Microsoft-Yahoo battle fading from the dynamic random memories of our over stimulated brains, it is time to turn our attention to Hewlett-Packard’s $12 billion $13.9 billion deal to acquire EDS, a services giant in its own right. The news was announced this morning. HP will purchase EDS at a price of $25 per share.

This indeed is the real thing: both companies have confirmed their talks and perhaps their seriousness. HP-EDS pairing will go down as one of the more significant developments of 2008, and its impact will be felt for years to come.

“I see it as an attempt by HP to really go head-to-head with IBM in a much more meaningful way, especially in technology services and IT outsourcing,” Dana Stiffler, research director at AMR Research told Computerworld. I think there is more to this deal than just old-fashioned outsourcing, and competing with IBM.

Typically, such a major deal means two things: Either the buyer has some issues with his current business, or he wants to make a big bet on the future. In case of HP CEO Mark Hurd, it might be a bit of both. There is only so much market share HP can carve out when it comes to printers and computers. More importantly, HP seems to be realizing that the future is about on-demand infrastructure. EDS brings to the table about 100 data centers around the planet.

Not everyone agrees with HP’s decision to buy EDS and get big fast. Forrester analyst Paul Roehrig is in that camp. Vinnie “Deal Architect” Mirchandani is someone I immensely respect and he brings up a very valid point when he writes:

But EDS is not Accenture or PwC (which IBM acquired) or TCS or Infosys. Its major strength is still in infrastructure outsourcing (though it has been growing its application and BPO capabilities nicely). HP’s outsourcing is similarly more skewed towards infrastructure. So, it is a scale play. But the timing is risky because infrastructure outsourcing is being challenged by data center consolidations, a secular decline in processing, storage and network charges and emergence of utility and cloud computing models.

However, I am taking a slightly more optimistic view of this deal, pointing out that this is HP’s bet on those very same trends — utility and cloud computing. HP might have finally realized that the future is about offering hardware as a service. Lets look at some of the recent developments

  • HP bought EYP Mission Critical Facilities. John McCain, senior vice president and general manager, HP Services, at the time of the deal remarked: “Acquiring EYP Mission Critical Facilities boosts HP’s ability to help customers transform their data centers and build dynamic computing environments from the ground up.” (via Rich Miller.)
  • HP bought Opsware, a data center automation software company started by Marc Andreessen, for $1.6 billion in July 2007.
  • In March 2008, HP announced its data center-as-a-service initiative, targeting large companies.
  • Yesterday, The Times of London reported that HP is close to buying 24 data centers currently owned by British Telecom in Europe for about $3 billion. The Times report says BT will provide Internet bandwidth, networks and remote access to HP, an area where the Silicon Valley-based giant isn’t that strong.

If you plot the EDS bid against these four recent developments, it is not that difficult to postulate that HP is building its own cloud focused on large global companies. Going further, I would channel something Vinnie says in his post.

HP’s hardware business has seen significant success in a number of emerging economies — running that infrastructure as a service does offer some unique opportunities.

I think this is a good point: Even though it’s growing fast, BRIC Bloc remains reticent to spend big dollars on infrastructure. Offering infrastructure-as-a-service to Indian telecoms or Chinese automakers of Brazilian biofuel companies is a much easier proposition then making them spend millions of dollars on blade servers, storage systems and networking devices.

Update#2: My favorite writer/thinker/troublemaker Nick Carr disagrees with me thesis about HP & the Cloud. He believes that this is a backward looking move:

an acquisition aimed at boosting profitability through consolidation and cost reduction in a mature business. The transition to the cloud will, for big companies, be a slow one, and there will continue to be much money made in running client-server infrastructures for many years.

Nick might be right, but in reality as he argues in his book, Big Switch (have you read it yet?), the world is going the way of the cloud, and even a company as stodgy as HP realizes that it has to transition to the future.

Update #3 Our colleagues over at OStatic, all of whom are open-source experts, have taken a deeper look at the deal as well. Go here for the full analysis.

What do you guys think?