Why Didn't Dell (DELL) Buy EDS (EDS)?

Late word is that Hewlett-Packard (HPQ) plans to buy technology outsourcing company EDS (EDS) for something like $13 billion. Shares in EDS rose almost 28% on the rumor. HPQ has a market cap of $115 billion so the price for the acquisition is well within its reach.

The scuttlebutt is that owning EDS will better allow Hewlett-Packard to compete with IBM (IBM), which has driven much of its growth through services and software. The Hewlett-Packard financial statements for last quarter put the company’s services revenue at $4.4 billion up from $3.9 billion in 2007. That was against total revenue of $28.8 billion. EDS had revenue of just shy of $6 billion last year ($1.5 billion a quarter), so it makes a significant addition to the service sector at HPQ.

Owning EDS will round out part of the Hewlett-Packard business which is already successful. It does not add a operation. It enhances one.

If EDS is sold to HPQ, it will have been a lost opportunity for Dell (DELL) to enter a new part of the IT industry and diversify away from selling hardware. The core of Dell’s strength is PC and server sales to businesses but it has not augmented that with any significant outsourcing or consulting operation. Last year, in the US, Dell’s sales to businesses were almost five times the revenue it got from consumers. It is an ideal mix of customers to create and drive a services arm. 

It would not be hard to make the case that Dell needs EDS much more than Hewlett-Packard is. A purchase by Dell would have been more of a financial stretch, but Dell desperately needs stretching. It is not going anywhere with its current plans for digging out of a multi-year funk.

The EDS deal says more about Dell than it does Hewlett-Packard. Under CEO Mark Hurd, HPQ has been opportunistic and nimble. None of that can be said for Dell. The company has not challenged itself to move back to the growth rates it enjoyed in its hay day.

Saying anything more about Dell is just wasting words.

Douglas A. McIntyre