EDS hit by takeover rumours

Speculation over the future of EDS intensified this week after reports claimed that Microsoft and Hewlett-Packard have approached...

Speculation over the future of EDS intensified this week after reports claimed that Microsoft and Hewlett-Packard have approached the embattled outsourcing giant over the possibility of taking a minority stake in the firm or even acquiring the company outright.

EDS, which last week announced the surprise departure of chairman and chief executive officer Dick Brown, said it did not comment on market rumour.

The merger speculation comes at a crucial time for EDS, which is the favourite to win the £4bn-plus Aspire contract to run the Inland Revenue's IT systems. It is also expected to be a key bidder for contracts in the £2.3bn NHS IT modernisation and a £4bn to £5bn Ministry of Defence modernisation, announced earlier this week.

Outsourcing experts, however questioned whether Microsoft or HP would want to invest in EDS and whether their businesses were compatible.

"It really is hard to see how a commodity product, channel-based software business has anything like a compatible business model with a bespoke large account service business," said Anthony Miller, research director of Ovum Holway. "There is also the issue of vendor independence, a tag which EDS would immediately lose if it merged with one of these players."

Miller added that EDS would be wiser to seek a cash-injection from an investment company.

"One of the underlying problems facing EDS and all mega-deal outsourcers is how to fund the upfront part of a major deal such as acquisition of customer assets and personnel. Why not seek investment from a company whose business it is to provide the readies? Surely this would be right up the street for someone like GE Capital to take an investment in EDS."

EDS has been rocked by problems with megadeals signed by Brown since his appointment in 1998.

Two key customers, WorldCom and US Airways, filed for bankruptcy last year while problems involving deals with the UK's social security department and the US Navy resulted in delayed payments worth hundreds of millions of pounds.

The resulting profit warning and an investigation by US financial regulators contributed to the loss of a multibillion dollar outsourcing contract that Procter & Gamble was about to award it late last year.

Last month Brown was forced to open EDS' annual meeting with financial analysts with the news of the collapse of final negotiations with French engineering giant Alstom over a multibillion-dollar outsourcing contract.

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