HP Eyes CSC to Build Services, Outsourcing Muscle

Acquiring Computer Sciences Corp. would bring risks, but could also allow HP to compete in the services and outsourcing businesses with the likes of IBM Global Services.

Hewlett-Packard Co.s reported interest in buying Computer Sciences Corp. brings its share of benefits and risks, according to industry observers.

The move could rapidly grow HPs services and outsourcing business, giving the Palo Alto, Calif., company the size and breadth to compete with the likes of IBM Global Services, they said. However, if not done right, such a move could prove to be a major burden on a company that is trying to improve its financial situation.

The possible deal was first reported in the Wall Street Journal Thursday, which said that HP would team with the Blackstone Group, a financial equity firm that had been part of another group that had looked into buying CSC before negotiations ended. That group—which included Lockheed Martin Corp. and Texas Pacific Group—reportedly had offered $12 billion this fall for the El Segundo, Calif., company. It was unknown what price HP and Blackstone may be offering for CSC.

Robert Sherbin, a spokesman with HP, declined to comment.

Acquiring CSC would bring in an influx of revenue for HPs services business as it looks to take on the larger players. Credit Suisse First Boston estimates that IGS will finish out its 2005 fiscal year with $48 billion in revenue. HP, whose fiscal year ended Oct. 31, reported FY 2005 services revenues at $15.5 billion, while CSC reported $14 billion in revenue. Its fiscal year ended in April.

Such a deal also would fuel HPs drive to grow its outsourcing business beyond its own hardware products, said Julie Giera, an analyst with Forrester Research Inc., in Cambridge, Mass. Ann Livermore, executive vice president of HPs Technology Solutions Group, which includes its services business, said about 18 months ago that HP wanted to expand the business.

CSC would bring with it a range of expertise and trained resources currently lacking at HP, enabling it to compete for more large outsourcing deals that may include running data centers that are outfitted with hardware from other vendors, such as IBM, Giera said.

It also would rapidly grow HPs outsourcing personnel, which would help the company vie for more large contracts. HP already has won a number of major outsourcing deals—such as the 10-year, $3 billion deal with The Procter & Gamble Co., in Cincinnati—but they also mean a large expenditure of capital and people.

"Thats why very large deals are a blessing and a curse," Giera said. "It gives HP credibility, but it also strains resources in terms of other big deals."

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Purchasing CSC also would give HP a larger presence in particular regions and verticals, she said. Right now, HPs services business is well-known in places such as Europe, but not as much in regions such as Asia and Australia. In addition, CSC has a strong federal government business and also is a player in the insurance sector.

HP needs to make a deal like this if it plans to continue to compete in an increasingly competitive sector of the IT industry. As with HPs hardware business, it is being squeezed from the bottom by the likes of Dell Inc. and its cutthroat pricing model, and behemoths like IGS and Electronic Data Systems Inc. In addition, the rising number of outsourcers from India also is putting a new spin on the business, Giera said.

Typically, when an outsourcing deal is made, the outsourcers buys some of the customers assets—such as purchasing the computer hardware and hiring some employees—which can lead to greater debt and higher costs. However, Indian outsourcers tend not to buy such assets, which means they are not as burdened by high upfront costs or the need to maintain and depreciate the hardware, and can price their services accordingly. This is putting even greater pressure on the major traditional outsourcers.

That said, the way HP is reportedly going about the deal—initially it would take a minority stake in CSC, then buy out Blackstone at a later date—makes sense, said Crawford del Prete, an analyst with IDC, in Framingham, Mass.

It would enable HP to do a lot of the work of integrating CSC into its services business, but "at the same time view it at arms length a little," with Blackstone making the initial heavy investment, del Prete said.

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