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HP Takeover of EDS Won't Challenge IBM's Current Market Dominance

by Staff Writers •
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There's been much discussion about HP's proposed takeover of EDS and its positioning to challenge the dominance of IBM. Intermedium research shows that even in combination with EDS, HP's share of the Federal Government market will still fall well short of the level of IBM's recent Government business.

Late last week, it was announced that EDS had accepted HP's US $13.25 billion ($14.23 billion) merger proposal. HP expects the deal to close in the second half of 2008.

In Australia, HP will establish a new business unit called EDS and no leadership changes as expected with EDS CEO Ronald Rittenmeyer retaining his position, but reporting to HP CEO Mark Hurd.

There has been much publicity about what the EDS takeover will do for HP, particularly in relation to its services business. In global terms, the arrangement is expected to more than double HP's services revenue.

EDS provides consulting and technology outsourcing services and has a US market value of around US$9.5 billion. In the Federal Government market, EDS was a dominant player in the whole-of-agency outsourcing arrangements that began in the late 1990s. It had outsourcing arrangements with the ATO (total value of $1.8 billion, due to end in 2009 and be replaced by three contracts), Customs ($678 million, broken up in June 2007) and Child Support Agency ($17 million and due to expire in June 2008). EDS was also the whole-of-government IT supplier to the South Australian Government, a deal reported to be worth $700 million when it expired in mid 2005.

The takeover will certainly enhance HP's position in the Federal Government market, but Intermedium's research shows that it will still fall well short of the market leader.

IBM dominated the Federal Government ICT market in 2006-07 with contracts worth $662 million, and almost 30 percent if the IT Services market. During the same period, EDS and HP won contracts valued at $124 million. In the 2006-07 period, IBM's ICT business was boosted by its Customs win (gained at the expenses of EDS, the incumbent outsourcing supplier).

In the 2005-06 financial year, IBM's dominance was not so pronounced with the value of IBM contracts around 30% higher than the combined value of those for EDS and HP. In the previous year (2004-05), EDS had a bumper year, and together, EDS and HP were well ahead of IBM.

While these figures are useful in providing some government market context for the media hype about this takeover, it should be noted that Intermedium's data (based on Austender) allocates contracts to the supplier awarded the contract. The value of HP contracts in this data is understated because it does not recognise HP sales made through partners and resellers.

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