How close can HP get with EDS?

So while everyone was busy watching Microsoft get rebuffed Yahoo!, it would seem that HP was busy cosying up services outfit EDS. The news cam through today that the companies have settled on a $13.9 billion deal to bring EDS into the HP family.

In an increasingly common tactic among merger-wary companies, EDS will continue as a separate operating unit, with no change at the top as Ronald Rittenmeyer holds on to the CEO/chairman/president role. EDS staff won't even have to move office, as HP plans on keeping them right where they are for the meantime.

The buy seems like a step in the right direction for HP, which has looked to expand its existing services offerings in recent years, and it could certainly do with some additional enterprise chops to look like a more rounded player than just a printer and PC hardware company. An acquisition that could really double HP's services revenue would be an attractive prospect indeed. The services portfolios are broadly complimentary, as are the main geographies for each. EDS strength in infrastructure services could fit well with HP's more product driven approach, for those customers that don't demand vendor-agnostic services.

By keeping EDS as separate unit, these issues of vendor independence could be somewhat overcome, and HP might also get around some of the integration issues that hit so many other tech mergers, including Compaq, which had barely managed to digest Digital Equipment Corporation before it was gobbled up by HP itself. The standalone approach is already working, with its HP ProCurve networking unit, which has steadily carved out market share for itself, now ranking number two worldwide in enterprise networking.

There are some barriers to overcome though. EDS has had almost flat revenue growth for some time, and it's not the services giant it used to be. The company has also been through a long period of streamlining, so there's not a lot of fat left to loose, so immediate savings won't be forthcoming. And while EDS does the majority of its business in the US, it is just about infamous in Europe, and in particular the UK, for a series of failed government IT projects. Unlike the gulf, public projects can be exceptionally difficult when costs are an issue and the political will behind the project keeps shifting, but even still, EDS has been a bit too close to a few too many high profile disasters to look like an attractive prospect to many European enterprises - whether they are ‘an HP company' or not.

There's also the question of how, if HP keeps the new acquisition at arms length, will EDS bring more business to HP's own services group, and help them build their skills? A coherent, seamless approach for enterprise customers seems a lot more attractive than a bitty, piecemeal one, especially if HP is going to stand against IBM in the services space.

The deal has the potential to create a services rival to Big Blue, but it will need careful steering to join the two companies to truly create a sum greater than the parts. Bridging the gap between the two looks set to be the first serious test for HP chief Mark Hurd, and he needs to be clear on the strategic future for EDS, whether its going to be just a revenue-generating add on, or a true value add for HP and its customers.