New Software Development Links Directory

SoftDevLinks.com is a new general directory for software developers, testers and managers. If you have a blog, a web site, distribute a tool or work a consulting company related to software development, do not hesitate to add a (free) link in this directory.

HP Acquires EDS: Too Much and Too Soon?

HP and EDS today announced that they have signed a definitive agreement under which HP will purchase EDS at a price of $25.00 per share, or an enterprise value of approximately $13.9 billion. The transaction is expected to close in the second half of calendar year 2008 and to more than double HP’s services revenue, which amounted to $16.6 billion in fiscal 2007. The companies’ collective services businesses, as of the end of each company’s 2007 fiscal year, had annual revenues of more than $38 billion and 210,000 employees. HP intends to establish a new business group, to be branded EDS – an HP company, which will be headquartered at EDS’s existing executive offices in Plano, Texas. HP plans that EDS will continue to be led after the deal closes by EDS Chairman, President and Chief Executive Officer Ronald A. Rittenmeyer, who will join HP’s executive council and report to Mark Hurd, HP’s chairman and chief executive officer.

Buying EDS would vault HP to second place in the global technology services industry, behind International Business Machines Corp. EDS brings HP a strong base in infrastructure outsourcing and the combined company would be better-equipped to go after large clients. In 2000 HP already tried to buy PriceWaterhouseCoopers consulting unit without success. IBM acquired this business in 2002 for a much lower price than what HP was ready to pay.

EDS has a lower margin than HP, but could offer more “stable” outsourcing revenues that are provided by long term contracts. It could help some cross selling other HP products. With this move, HP is trying to emulate IBM’s strategy, as IBM draws about 60% of its revenues from services. By acquiring EDS, HP also gets its hands on EDS’ 60 percent stake in mPhasiS, an Indian services and outsourcing company, with 27,000 workers. IBM has around 50,000 employees in the region; Accenture about 22,000. The EDS stake in mPhasiS could allow HP to reinforce its presence in the fast growing Asiatic market.

However, HP could also face some serious problems. The lack of integration means that the deal will bring no cost synergies, usually an important motivation for this type of acquisition. We could also see some possible political wars between HP and EDS employees that will fight for independence.

The financial community is worried about the price paid. HP shares fell nearly 7 percent after the deal was announced on Tuesday, on top of a 5 percent drop on Monday in anticipation of the news. The declines have wiped about $13 billion off HP’s market value, taking it to $108 billion. The important question is to know if HP, like for the missed PWC deal of 2000, has the bad habit to buy at the peak of the market? Did somebody else want to acquire EDS at this price with the uncertain economic forecasts?

Borland (Finally) Sells CodeGear to Embarcadero

Yesterday Borland Software Corporation announced today a definitive agreement to sell the assets of its individual developer tools unit, CodeGear, to privately held Embarcadero Technologies. The purchase price for CodeGear is expected to be approximately $23 million. Borland will also retain CodeGear’s accounts receivables with an approximate value of an additional $7 million. The transaction is expected to close by June 30, 2008.

Borland made this announcement the same day that it announced a GAAP net loss of $22.3 million for the first quarter of 2008. Borland has been loosing money for quite a long time, at least since it already tried to sell its tools division at the end of 2006, before setting an independent entity named CodeGear. In 2007, Borland already reported a GAAP operating loss of $61 million for the year compared to a loss of $53.1 million in the prior year.

For 2007, CodeGear reported $57 million in revenue and Borland total revenue were $268.8 million. The price paid by Embarcadero is therefore around 50% of yearly revenues. This could be compare for instance with the price paid last year by IBM to acquire Telelogic, which was around 300% of 2007 revenues. Borland management has been accusing the tool division for dragging down profitability for a long time. It is more difficult today to be active in this market area, when most developers could use free open source solutions like Eclipse or NetBeans. Even commercial editors like Oracle or Microsoft offer a free basic edition of their IDE. With this transaction, we will finally able to judge Borland’s management on its ability to develop the other products (Silk, Caliber, StarTeam, etc.)

The question is why would Embarcadero buy such an apparently bad business? First, its current product is centered around database development, so there is no redundancy with CodeGear programming tools… but the management could see redundancies in the sales and administration people and cut a large part of the costs. With a “small company” culture, Embarcadero could be used to a more controlled spending that people used to the large pockets of Borland. Due to the price paid, Embarcadero is taking a relatively small financial risk, as it could have more easily a positive return on its investment with CodeGear recurring revenues. Finally, as Embarcadero was until now active on a “niche” market (database tools), it could have been less sensitive to the competition in the IDE segment.

It has to be noted that CodeGear has also made recently good efforts to explore new markets, like PHP and Rails, different from its existing Delphi, C and Java base. This could provide a good opportunity to cross-sell products through existing customer base. I hope that the growth forecasts announced in the acquisition press release will realize for the benefit of employees of these two companies, but I think that the expansion of diffusion of free open source and commercial competing products will make it very difficult to achieve them.