HP's plan to buy EDS to spark M&A in IT services sector

By Sumeet Chatterjee and Tiffany Wu

BANGALORE/NEW YORK (Reuters) - Hewlett-Packard's move on Electronic Data Systems Corp is likely to spark a round of consolidation in the technology outsourcing sector around the globe, as suddenly much-smaller rivals scramble to stay competitive.

Analysts say Infosys Technologies Ltd, Tata Consultancy Services, Wipro and Cognizant Technology Solutions may now be forced to look for acquisitions to compete with a combined HP and EDS and boost flagging profit growth.

"Businesses of companies like Infosys and Wipro are under pressure, as their rivals like IBM and Accenture have really learnt how to be competitive even in a sluggish economy," said Avinash Vashistha, CEO of outsourcing consultancy Tholons.

"This merger, if it happens, will only make situation worse for them by potentially creating a third competitor," he said.

"Now, it has become imperative for them to make acquisitions to fill the gap in their services portfolio and get a global footprint. If they don't go for inorganic growth at this stage, they will clearly be at a competitive disadvantage."

HP is in talks to buy technology outsourcing company EDS for $12 billion to $13 billion in a deal which would vault it to a close second to IBM in technology services.

A source briefed on the matter told Reuters that a deal could be announced by the close of business on Tuesday. HP and EDS have said they were in talks about but given no details.

HP has long considered an acquisition to beef up its tech services business, a sector that offers relatively stable income and high margins even in an economic downturn.

Worldwide computer services revenue rose 10.5 percent to $748 billion in 2007, according to market research firm Gartner Inc.

IBM was the leader, with a 7.2 percent market share. EDS weighed in at No. 2, with 3.0 percent of the market, while HP was No. 5, with a 2.2 percent share.

Analysts say Indian outsourcers, already battling slowing profit growth due to a slowdown in their main U.S. market and rising cost of operations in their home country, may now seek buys in the United States and Europe to boost growth.

While all four big Indian services firms missed market estimates for net profit last quarter and issued cautious outlooks, IBM and Accenture reported better profits and raised their guidance.

India's cash-rich IT services firms have so far restricted themselves to smaller buys as their businesses were growing rapidly organically and they were wary of integration issues.

But analysts say things may change soon as they look to add new service lines, strengthen marketing muscle and add large clients in new regions.

Last year, talk circulated that Infosys, which has a market value of $24 billion, or smaller rival Wipro may bid for Europe's biggest IT firm Capgemini, but all the companies denied the rumors.  Continued...