HP/EDS deal puts pressure on outsourcing rivals

Outsourcing firms are set to face stiff competition in the form of the newly-merged HP and EDS, say experts.

The $13.9bn (£7.1m) acquisition of EDS by HP was announced hours ago after both companies confirmed talks this morning.

Rivals will probably find themselves having to reassure shareholders, said Douglas Hayward, research manager at analyst IDC.

"This is a definite wake up call for Logica, Capgemini, Atos Origin and others. Their shareholders will likely worry about the ability of these firms to continue to compete effectively in the IT services market – and will likely put senior management under increasing pressure to take decisive action," he said.

"HP has just thrown a big stone into the IT services pond and this should definitely scare some of the smaller fish."

But while HP, seen as weak on offshore outsourcing, will benefit from access to EDS’s resources, and the companies will complement each other geographically, it will not be all plain sailing, said Hayward.

"Another major acquisition for HP risks creating real organisational and cultural strain at HP, not to mention at EDS," said Hayward.

"Continuous change for employees can only be cause for disruption. Merging the DNA of the two organisations will be painful. HP investors, given the pain of the Compaq acquisition, are understandably sceptical - HP shares fell five per cent yesterday evening, while EDS's rose 27 per cent."

Ovum analyst Phil Codling said the combined company will face challenges in integration.

"On paper an HP-EDS combination looks workable. But in practice it could prove anything but," he said.

"Ultimately, whether IBM, Accenture, CSC and Capgemini need fear the outcome of this potential deal would rest on the success or otherwise of what would undoubtedly be a very ambitious corporate integration project."