24 March 2003 Microsoft and Hewlett-Packard have both approached services giant EDS with a view to forming a long-term strategic partnership or taking an equity stake, according to reports in the Financial Times.
The newspaper reports that such talks are not active at present, but that the company is still considering its options. It follows the replacement of CEO Dick Brown, who has run EDS since 1999. A new CEO, Michael Jordan, has already been appointed.
But EDS shareholders are likely to be furious at the size of Brown’s settlement — worth around $35 million — details of which were revealed after the markets closed on Friday March 21.
According to the FT, Microsoft made a direct approach to EDS, seeking to take a minority shareholding and put in place a long-term technology alliance. Microsoft, whose CEO Steve Ballmer is on the board of EDS’s rival Accenture, is concerned that its lack of influence among the major services suppliers will prevent it winning enterprise level system software business.
HP also needs to build up a larger services business and has held talks with several services companies in recent years. An $18.5 billion deal to acquire PricewaterhouseCoopers in 2000 fell through after HP CEO Carly Fiorina had second thoughts. It was bought by IBM for just $3.5 billion two years later.
An outright acquisition by HP is likely to viewed by analysts as a strategic fit, giving the company the scale it needs to compete against IBM and its successful Global Services business. However, HP is still grappling with the structural and financial issues created by its huge acquisition of Compaq.
In addition, EDS is currently valued at $8.5 billion — too high for HP at present.
EDS is profitable on sales of around $22 billion a year — but its business model, which involves up front investment and risk taking on large services contracts — has created raised questions about its cash flow. However, there is no suggestion that EDS is at risk of serious liquidity problems at the moment.