HP's EDS deal could spark M&A in tech services

By Sumeet Chatterjee and Jim Finkle

BANGALORE/BOSTON (Reuters) - Hewlett-Packard Co's (HPQ.N: Quote, Profile, Research, Stock Buzz) deal to buy Electronic Data Systems Corp EDS.N is expected to spark a round of consolidation in the global technology outsourcing sector, as suddenly overshadowed rivals scramble to stay competitive.

Analysts said India's Infosys Technologies Ltd (INFY.BO: Quote, Profile, Research, Stock Buzz) (INFY.O: Quote, Profile, Research, Stock Buzz), Tata Consultancy Services Ltd (TCS.BO: Quote, Profile, Research, Stock Buzz), Wipro Ltd (WIPR.BO: Quote, Profile, Research, Stock Buzz)(WIT.N: Quote, Profile, Research, Stock Buzz) and Cognizant Technology Solutions Corp (CTSH.O: Quote, Profile, Research, Stock Buzz) may now be forced to look for acquisitions to compete with a combined HP and EDS, and boost flagging profit growth.

Meanwhile in the United States, analysts also expect the industry to trend toward consolidation though the pace could be slower as players like International Business Machines Corp (IBM.N: Quote, Profile, Research, Stock Buzz) and Accenture Ltd (ACN.N: Quote, Profile, Research, Stock Buzz) are in stronger positions.

"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 (the) 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 struck a deal to buy EDS for about $12.6 billion, which would vault it to second place, behind IBM, in tech services -- a sector that offers relatively stable income and high margins even in an economic downturn.

EDS has some 27,000 workers in India after buying 62 percent of MphasiS, a Bangalore-based IT outsourcing company, in 2006. Prior to that EDS only had 3,000 workers in India.

IBM ON THE PROWL?

Together HP and EDS would have roughly $39.4 billion in services revenue, compared with IBM's $54.1 billion last year.

"HP has really driven their stake into the ground saying they are going to be a major player for the large corporate clients around the world," said Murray Beach, head of investment banking for TM Capital.

But Beach does not see IBM -- which bulked up its services division in 2002 with the $3.9 billion purchase of PwC Consulting -- aggressively looking for acquisitions.

"I don't see any reason why they will have to," he said, noting that IBM already does a good job of using its services business to sell hardware and software, and remains in the No. 1 spot in the industry even after HP buys EDS.

Furthermore, the big Indian IT firms are not considered easy takeover candidates themselves. Wipro and Satyam are family controlled, while TCS is majority owned by the Tata family group and Infosys is controlled by a group of founders.

Yankee Group analyst Zeus Kerravala said the HP-EDS deal could spur some outside companies, such as network operators, to look for targets to expand into the consulting business.

He cited AT&T Inc (T.N: Quote, Profile, Research, Stock Buzz), BT Group (BT.L: Quote, Profile, Research, Stock Buzz), France Telecom (FTE.PA: Quote, Profile, Research, Stock Buzz), NTT (9432.T: Quote, Profile, Research, Stock Buzz) and Verizon Communications Inc (VZ.N: Quote, Profile, Research, Stock Buzz) as examples. "Looking at Accenture or CSC would make some sense" for those telecom companies, Kerravala said.  Continued...