HP and EDS: A chat with CEOs Mark Hurd and Ron Rittenmeyer

May 14, 2008: 6:58 AM ET

Early in the life of Hewlett-Packard, an adviser warned co-founder Dave Packard that more companies die from indigestion than starvation. The message: Be careful how you handle acquisitions.

With CEO Mark Hurd's announcement Tuesday that Hewlett-Packard (HPQ) will purchase services giant EDS (EDS) for $13.9 billion (including EDS's cash and debt), Hurd is making a bold statement that his team is operationally strong enough to handle the heartburn.

There are plenty of investors who aren't convinced. As of Wednesday morning HP stock had lost about 8 percent of its value since word of the deal leaked out, bringing it under $46. That means shares are down almost 15 percent since their October high. Meanwhile IBM (IBM) shares are up 10 percent since October.

EDS will be a new operational division of HP based in Plano, Texas, with EDS chief executive Ronald Rittenmeyer reporting directly to Hurd. Hours after the deal was announced Tuesday, Fortune spoke to Hurd and Rittenmeyer about how they will approach customers, grow HP's software business, and control costs. Below is an edited transcript of our chat.

A big issue on Wall Street's mind is going to be costs, and the fact that EDS at close to 140,000 employees has nearly as many people as HP. What assurances can you give about how you can cut costs out of the equation here?

Hurd: We gave financial guidance today about this deal being non-GAAP accretive in '09 and GAAP accretive in 2010. Certainly that has implications on cost. I would tell you that we think we know a lot about cost structures and how to align overhead cost structures, and I can assure you, Jon, we'll deliver on that.

In the past under HP's structure, salespeople from the Technology Solutions Group had taken the lead selling to big companies, bringing in the Personal Systems Group and Imaging and Printing Group behind them. With EDS in the picture, how do you plan to make sure the sales approach doesn't get too complicated?

Hurd: I think we always work to simplify our approach. Part of the blessing of HP is the scale and the capability that we bring to customers and the market, and part of the issue we have to work through is making sure our scale doesn't turn into bureaucracy and complexity. So we're constantly trying to make the company simpler and easier to do business with.

But I would look at the engagement with EDS no differently than how we work our services business today. Today, our TSG sales force goes to market and when it sees a services opportunity, it brings in HP's services business. It'll be no different with EDS. We'll need to educate them about the breadth of the capability of EDS, so that when they see an opportunity that makes sense, they become a demand-creation organization. So I don't see it creating any net new complexity. And Jon, as you know, we'll always be on guard trying to make sure that if it does, we eradicate it as quickly as possible.

EDS had been working to de-emphasize lower-margin services work like mainframe management and call centers, and instead chase higher-margin jobs like custom software development. How does getting bought by HP help EDS in that transformation?

Rittenmeyer: From an applications development standpoint, we have done an awful lot to continue to grow that. We have signed a very extensive alliance with SAP (SAP), and we've done some stuff with Microsoft (MSFT) recently. So we are going to continue to grow that business. It's got upside.

Remember, our application maintenance business is about $4 billion - $5 billion. It's one of the largest out there. And it gives us great leverage for application development, because we're already out there.

We run their systems. We probably have some of the best people in terms of knowledge of legacy modernization in the marketplace. So I think what this does is it provides us with a much broader technology base, and a much deeper technology base than we have. And the access to that will only make these offerings a heck of a lot more capable and a lot more effective when we go to market. So I think it absolutely marries the right connection of the two. Because HP, from an applications standpoint, that's not their biggest field. And it is one of ours.

Hurd: Jon, one point that you might be interested in is that the largest application development app on the market is Mercury [which HP purchased in 2006]. So the fact that we can bring the Mercury software assets to the services capabilities of EDS is, we think, strategic in this deal. Secondly, the biggest customer of Opsware [which HP acquired in 2007] was EDS, and if you look at data center automation and server management, we think we can bring a software portfolio that's pretty attractive to the automation processes, and create a real win for customers.

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