HP Looks To Start Some Trouble

If Hewlett-Packard Chief Executive Mark Hurd manages to grab technology services giant Electronic Data Systems the most interesting part won't be what the deal does for Hewlett-Packard, but what it will do to some of the Palo Alto, Calif., technology giant's competitors.

In a statement released Monday, Hewlett-Packard (nyse: HPQ - news - people ) acknowledged it is in "advanced discussions" with Electronic Data Systems (nyse: EDS - news - people ) about a possible business combination. The Wall Street Journal reported earlier in the day that a bid would likely value the Plano, Texas-based EDS at between $12 billion and $13 billion.

Both companies said there could be no assurance that an agreement would be reached and that they don't plan to comment further until an agreement is reached or the discussions terminated. Trading in the two companies' shares was halted late-afternoon Monday for news pending.

A tie-up would bolster HP's place as IBM (nyse: IBM - news - people )'s prime competitor in the business of managing technology for governments and big companies. Just as neatly, however, it also creates problems for HP competitors Xerox (nyse: XRX - news - people ), Dell (nasdaq: DELL - news - people ) and Sun Microsystems (nasdaq: JAVA - news - people ), all of whom sell products through EDS.

"When EDS put those partnerships together, they were clear about who owned what in terms of swim lanes," says Lindy Hanson, a senior analyst with Technology Business Research. An HP-EDS merger would be a concern for them, she says. "It just opens up a huge channel for HP to move products through as well as reaping the benefits of having a services business."

The biggest loser would be Dell. The once strong alliance between EDS and Dell has been weakened over the past year since EDS brought in HP as second partner when providing desktops, Hanson says. A merger with HP would take the alliance to the point of collapse. "All of a sudden HP is going to have a huge channel for its servers and desktops," Hanson says.

Sun, whose sophisticated Unix servers and data center gear competes with HP on the high end, could be hurt as well. "You'll still have customers who want Sun, and I don't think HP and EDS will turn them away, but there's also an opportunity to get HP gear in there wherever they can," Hanson says.

Such considerations make a strong services business a neat fit for HP. Carly Fiorina, Hurd's predecessor, made building up HP's services arm a priority. In late 2000, however, Fiorina abandoned a bid for the consulting arm of PricewaterhouseCoopers, opting instead to launch a risky bid for PC rival Compaq the next year. Trouble digesting Compaq led to Fiorina's ouster in early 2005. IBM acquired PWC's consulting arm in 2002.

Since then, Hurd's HP has focused on smaller fish, many of them supplementing HP's lucrative software business. His largest deal was the $4.5 billion acquisition of information technology software specialist Mercury Interactive (other-otc: MERQ.PK - news - people ) in 2006. An acquisition of EDS would be "make or break for [Hurd]," Hanson says.