Hewlett-Packard vaults into ranks of top federal contractors with EDS deal

Hewlett-Packard's $13.9 billion deal to acquire Electronic Data Systems announced Tuesday will put HP in a strong position in the federal information technology services market and possibly provide a platform to sell additional hardware to government customers, analysts said.

The deal, expected to close within 120 days according to an EDS source who declined to be identified, will propel HP into the upper ranks of federal contractors.

Paul Roehrig, an analyst at Forrester Research Inc. in Cambridge, Mass., said the deal will make HP a force in IT services and give it a "a seat at the table for big deals." Roehrig said he believes HP "is absolutely interested in the federal market" and that the acquisition will strengthen its position.

Ray Bjorklund, senior vice president and chief knowledge officer at McLean, Va., market research firm FedSources, said HP's push into the services market marks a dramatic change for the company, particularly in the federal market. Compaq Computer had a strong position in federal IT services when HP acquired that company in 2001, Bjorklund said, which diminished as HP focused more on hardware.

Roehrig said with the addition of EDS, HP will have the opportunity for a "massive hardware pull-through" into the federal market via the services contracts EDS holds. But Bjorklund noted that agencies typically want a range of hardware options when they negotiate IT services deals, and he said, any plans to marry HP hardware with EDS services should be approached with caution.

Warren Suss, president of Suss Consulting Inc., a Jenkintown, Pa., firm focused on the federal market, agreed, saying the new HP will have to be technology neutral in dealing with government customers. Suss called the deal a good match, because of the lack of overlap between the two companies.

The largest federal contract EDS holds is the $10 billion Navy Marine Corps Intranet program, serving 650,000 users in the continental United States, Hawaii, Japan, Guam, Puerto Rico and Guantanamo Bay, Cuba. It expires in 2010.

Though problems with NMCI resulted in EDS writing off $559 million in deferred costs in 2003 and another $375 million in 2004, Roehrig said he believes NMCI is now profitable and no longer the "boat anchor it used to be."

EDS holds multiple contracts with the Centers for Medicare and Medicaid Services, including a 10-year, $1.9 billion data center contract shared with IBM Corp. and Companion Data Services LLC, a subsidiary of Blue Cross Blue Shield of South Carolina that was awarded in 2006.

The company also has multiple contracts with the Veterans Affairs Department, including a high-profile contract awarded last week to manage VA's Combat Veteran Call Center.

EDS ranked number 19 in Government Executive's list of the Top 200 federal contractors for 2007, with $2.4 billion in awards in fiscal 2006. EDS had $22.1 billion in revenue in 2007 and 139,000 employees. HP had $104 billion in sales last year, with 159,000 employees. EDS headquarters will remain in Plano, Texas, after the deal is completed. The firm will be branded as "EDS -- an HP Company."