Who would buy EDS?

Anthony Miller, Research Director, Ovum Holway

Now that the news of Dick Brown's departure is sinking in, the rumour mill has sprung into action with all sorts of speculation as to who is going to invest in or even acquire EDS. As usual, these prognostications range from the "interesting" to the absurd, so let's look at them.

Firstly, the enterprise software vendors, like Microsoft, Oracle, SAP et al. Well, this risks harking back to the late 90's when Computer Associates made an ill-considered attempt to acquire CSC. The idea was crazy then and it's still crazy after all these years. It really is hard to see how a commodity product, channel-based software business has anything like a compatible business model with a 'bespoke' large account services business.

Of course, there is also the issue of 'vendor independence' a tag, which EDS would immediately lose if merged with one of these players. Whether one of the major software players would want to invest in EDS is also moot. Microsoft has made all sorts of tilts at investing in some weird and wonderful outfits, but the return on these investments - particularly the large-scale ones outside of its direct business model, like the cable companies - has been dire. So why bother?

What about the hardware vendors, such as HP, Sun and Dell? Well, let's scrub the latter two. It's ridiculous to think that a slick PC assembly firm is going to be able to make a go of a managing EDS. And as for Sun - far too narrow a product range to make the equation "EDS + Sun = IBM" work. Anyway, Sun has its own problems and should not even be thinking about it. HP is an "interesting" option, though.

We had always been critical about HP's acquisition of Compaq but even we would have to say that our worst fears have not (yet?) materialised. This is NOT the same as HP's misguided attempt to acquire PwC Consulting as EDS is (primarily) an infrastructure services outfit, much more aligned to HP's services business. But HP's services business is a very small part of the whole, and on balance we don't think it would work. In any event, HP still has a way to go before all the creases are ironed out of the Compaq deal.

What about IBM? Actually, we think that would be the best option, especially as it would also give IBM about the only piece of the services jigsaw it is missing, i.e. a "real" management consultancy (AT Kearney). The only problem is that with EDS and IBM both in top ranking positions in the IT sector of almost every country around the world, we can't see how such a deal would get through the competition authorities, even if IBM was interested.

Is there another option? Yes, we think there is. One of the underlying problems facing EDS (indeed, all mega-deal outsourcers) is how to fund the up-front part of a major deal (acquisition of customer assets, personnel etc). So why not seek investment from a company whose business it is to provide the "readies"? Surely this would be right up the street for someone like GE Capital to take an investment in EDS? It gets over all the problems of vendor independence and would surely boost investor confidence. It also gives new EDS CEO Michael Jordan a much broader range of strategic options.

Anyway, undoubtedly the rumour mill will continue to churn this one over for some time yet. But let's hope that Jordan doesn't feel under pressure to make any decision instead of the right decision.

This article first appeared in Ovum Holway Hotnews on Monday 24 March 2003.

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