It is old news now that HP will purchase EDS at a price of $25.00 per share, or an enterprise value of approximately $13.9 billion. The terms of the transaction have been unanimously approved by the HP and EDS boards of directors. Now the work begins for these two companies.
It is no big surprise this was really one of the last ‘big moves’ HP could make to take on IBM. Of course, many of us wondered why this strategic move hadn’t happened before now – instead of the failed PWC acquisition attempt or the, initially, combative and ultimately controversial acquisition of Compaq in 2001. That acquisition certainly has played out well for HP – from a market expansion, perspective. The question is: will the EDS integration play out as well?
As we all know, IBM is the leader in the services market, with revenue around $54 billion annually. EDS revenue is about $22 billion annually, and Hewlett-Packard, $16.6 billion; the combination of the two companies will put it second to IBM in the $748 billion industry. So – ‘mission accomplished’ from an ‘expansion’ perspective – particularly in the infrastructure outsourcing market segment. And, of course, there is the potential to shrink cost and provide higher levels of service through this increased scale. This move will position HP to capture more of the lucrative services business at a time when the hardware side of the industry has become less profitable. So, if HP is going to go after IBM for ‘top seat in the house’ – financially and operationally – it is a no-brainer. The integration, once completed, could make HP a global Goliath.
Ah…..and therein lies the rub…….
The ‘integration’ is no small feat. Never is the concept of ‘alignment’ more critical than when merging companies. The success record for mergers of this size is spotty at best. How many failed attempts have we seen? Where there were too many ‘chiefs’ and not enough ‘followers’, too many strategic vectors pointed in too many differing directions, too many silos with folks all worried about their job, their budgets, their security, and candidly, the cultures and values were just too different to make ‘digestion’ palatable. This ambiguity and uncertainty can and will stagnate progress. Finally, it has been proven that it is a huge risk to underestimate the ‘soft stuff’ (as it truly is the ‘hard stuff’) when it comes to aligning a company’s most valuable asset: its people.
So what to focus on first? The $13.9 billion dollar question.
Strategic Intent and Vision
Growth by acquisition has been a focal point of Mark Hurd’s sense he joined HP 3 years ago. He has spent more than $6 billion on software companies, including the $4.5 billion acquisition of Mercury Interactive Corp. in November 2006. Of course, growth by acquisition allows speed to market in key areas of strategic importance versus organic growth.
Enhancing the offerings and capabilities around infrastructure outsourcing, through this particular acquisition, is the obvious rational. However, this is not where the potential benefits stop. What about the potential to leverage EDS’s capabilities down to the consumer level, which HP has strong presence, by cooperating with and leveraging the huge indirect channel HP has developed? What about moving HP and EDS into the utility and ‘cloud’ model for delivery? How does HP’s software division’s significant growth through acquisition play into this model?
Talk about ‘game changing’.
Getting all the wood behind the right arrow could turn the market on its ear. It is a well-known fact that Mark Hurd has done a tremendous job of cutting most of the fat from HP. Now the industry will stand by with anticipation to see how (and if) he can translate this operational excellence into strategic execution.
Ann Livermore has overseen all the pieces of Hewlett-Packard’s services business. In this arrangement, the outsourcing segment that EDS specializes in will be managed by Ronald A. Rittenmeyer, the chief executive of E.D.S, who will report directly to Mark Hurd. Some analysts perceive this as ‘interesting’, as there have been questions about how he was doing since taking over as CEO at EDS.
Hard calls on not only ‘who will be on the bus’ but who will be ‘driving the bus’ are paramount. Old school thinking will simply not play in this new game. Having gutsy, true visionaries to lead HP into the new models will prove critical. In addition, leading and integrating over 145,000 employees from EDS into the HP fold, which is the largest number of people the IT services sector has ever seen, is daunting – to say the least. It is not for the faint of heart. Couple the scope and size of the workforce, with the generational (Gen X and Y) differences, not to mention the global presence – and you have a recipe for the one of the most complex and challenging leadership opportunities the technology sector has faced.
The diversity of talents Mark will require from his leadership team is vast. The ‘same old way’ will simply not work – and ‘standard operating procedures and methods’ will fall short. Strong executives who prove they are decisive, accountable, and have a sense of urgency will be required. In the same breath, these leaders will need to be great communicators and empowering to their teams.
“Selling” the vision and “gaining 100% buy-in” for execution is a requirement – anything (or anybody) short of this – will fail.
Shared Values and Culture
A company’s culture is not some ‘fuzzy’ intangible without real teeth. Many of us have read Jim Collin’s book, “Good to Great”, www.goodtogreat.com. He states that there is ‘power when you combine a culture of discipline with the ethic of entrepreneurship, you get the magical alchemy of great results’. The ‘culture’ of a company is basically the shared values among the employees which manifest through their behaviors – internally and externally to/through the market.
There is no doubt that EDS’s historical culture was steeped in a disciplined, military tradition, rigorous and tight parameters, with undeniable hierarchy, bureaucracy, and centralized power. Hewlett-Packard, though this culture went through a complete ‘shake and bake’ when Carly Fiorina took the helm coupled with the Compaq merger – and of course the stringent ‘cost cutting’ focus brought by Mark Hurd, still has some remnants of entrepreneurial and de-centralized decision making.
The two historical cultures simply could not be more different.
However, the potential for greatness is there. What I will suggest is that the cultural shift will happen last. The anchoring of newly shared values will happen through the actual transformational process – through proven results of a ‘new way’, open (and sometimes controversial) communication around the new approaches, and when necessary – the leaders my need to change the team or key people to insure the transformation doesn’t stagnate. Time is of the essence through the transformation – the market will not wait for HP/EDS to ‘get it together’.
Though the actual ‘cultural shift’ may not happen until the end of the integration – it is a non-negotiable for the executive leadership to have a vision of where and what they want the ‘end game’ to look and feel like. As Wayne Gretsky said about his Olympic experience: “You have to skate to where the puck is going, not where it is now”.
So, now, we have the wonderful opportunity to ‘sit, watch and wait’ as Hewlett-Packard ingests EDS. Odds are favorable that this will be another feather in Mark Hurd’s cap. There is no doubt, however, that without alignment around his overall vision, within his leadership team, and among his most valuable asset – his people – this potential ‘game changing’ opportunity will miss the mark.