HP has announced its intent to buy EDS and the process is already in stark contrast to the failed one Microsoft used on Yahoo. IBM is the competitive target for the HP acquisition and HP moved ahead of IBM some time ago in terms of worldwide revenue, though with a distinctly different product mix. HP has chased IBM for decades. Now, knowing that it is in the lead, it apparently plans to lengthen that lead.
We'll contrast several aspects of the failed Microsoft/Yahoo merger attempt and what will likely be a successful attempt by HP. For most of you, the result of the HP/EDS merger will be vastly more important because you do business with one of these two companies.
Interestingly enough, Microsoft will benefit more from the HP/EDS merger if it is successful because HP remains a better partner to Microsoft than IBM is (IBM is more of a competitor these days). And this should significantly enhance HP competitively against IBM. Let's take a look at the process from approach through executive team.
A large merger, as we saw with Microsoft/Yahoo, is a difficult dance (HP doesn't have Google working behind the scenes to break its deal). HP is one of the few firms that has done a big one successfully, acquiring Compaq earlier this decade, but it was far from painless. The proxy fight that preceded the merger caused HP to create a merger process that probably is unmatched in any industry.
In this instance, while the Microsoft/Yahoo merger became hostile at the outset and never was close to closing, the HP was close to closing when it was announced. Merger attempts can actually drive companies apart because they flesh out differences. Keeping the process confidential until after the negotiations were effectively complete allowed the two sides to focus on finding ways to complete the process rather than having to constantly try to sell one side.
From the outset, HP is being clear that this is a reverse merger with EDS remaining intact and gaining control over HP's outsourcing business, which is substantially smaller. This gives EDS employees and executives a great deal of initial comfort and makes it look like they are acquiring HP's business rather than the other way around. For Microsoft/Yahoo, the final structure was not clear. The executive staff in Yahoo appeared to be at risk, making it more difficult and eventually contributing to the failure of the Microsoft attempt. In short, from the moment this was made public, the odds of closing were very high for HP.
Combined, EDS and HP, in terms of outsourcing revenues, are within striking distance of IBM, depending on how you cut the numbers. IBM has around $50 billion in revenue in this space, and the HP/EDS will have close to $40 billion. Acquisitions typically put a drag on revenue because they can be a distraction, so this gap is likely to widen, but given the nature of the acquisition, probably not significantly. There appears to be little doubt that HP will benefit by the result because it allows it to more strongly match up against IBM.
For Microsoft/Yahoo, the combined firm would have been left well under half of Google's strength in online advertising. Plus, the lack of certainty over the final structure of the combined entity would have likely caused Google to strengthen its position substantially while the merger was going on. Yahoo and Microsoft's own Internet unit were having significant competitive execution problems and the market never came around to believing the result would be in Microsoft's benefit.
In the end, the market perceives Microsoft and Google to be very different companies, while it perceives HP and IBM as primary competitors. This allows those that cover HP to more easily see the benefits of the EDS acquisition. In contrast, there was clearly a significant struggle to see the benefits of Yahoo to Microsoft. This makes it vastly easier for HP to keep HP investors happy through the approval process.
Mark Hurd/Shane Robison
HP's CEO has been executing very well and HP's financial performance has generally been market-leading in key business units. This provides a backdrop of confidence; analysts, for the most part, seemed to support HP in the move. If you are confident in a CEO's judgment as an analyst, you are more likely to give that executive the benefit of the doubt. In Microsoft's case, Steve Ballmer does not yet enjoy the confidence that Bill Gates once did, and this became problematic. His decisions aren't as trusted as Mark Hurd's. This is often the case when a founder leaves; those who follow often struggle to gain the internal and external support the founder once had.
In Hurd's case, he came in and successfully addressed the shortcomings of his predecessor. In addition, in Shane Robison, he has a strong strategic lieutenant that the market has come to trust as well. The combination has no peer currently in Microsoft with regard to building confidence in major moves. HP, while likely still bureaucratic inside, appears to the outside as a cohesive whole. That appearance pays large dividends in moves like this.
In the end, HP, thanks largely to the way the company is perceived by the outside world and due to solid planning and execution, is very well positioned for a merger of this magnitude. In addition, by articulating this from the outset as a reverse merger, placing HP's assets inside EDS', it removed the majority of the concerns likely coming from the EDS side and helped eliminate early on a lot of the conflicts that often result. Finally, this was kept out of the public eye until late in the process, reducing substantially the time that those opposing the merger would have to build a credible response.
While few mergers ever achieve their promised benefits, by solidly executing on the early phases of this one, HP has demonstrated a benchmark approach, raising substantially the likelihood that the benefits it anticipates will be realized. The envelope of trust that surrounds the executive team should give HP the support it needs to complete this process.