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Hewlett Packard Clinches $1.3B Megadeal with CIBC

HP Breaks into IT Services Major League

 Outsourcing Deal Grew Out of Intria-HP Joint Venture

TUCSON, Sep. 17 - After having spent most of the last decade or so competing in the shadow of the IT services giants, Hewlett Packard's service organization has finally hit a home run.  HP and Canadian Imperial Bank of Commerce (CIBC) announced this morning in Toronto a seven-year $1.3 billion (CDN$2 billion) megadeal which propels the well-known Silicon Valley product company into the Major Leagues of IT services.

"HP's outsourcing agreement with CIBC is a testament to our ability to provide mission-critical, multi-platform, high-availability IT infrastructure services" said Ann Livermore, executive vice president, HP Services. "As the third largest IT services organization in the industry, we are better poised than ever to continue to drive clear business value for our customers."

That HP is the third largest IT services organization in the world (after IBM and EDS) may come as a surprise to many, even to some IT industry pundits.  That's what living in the shadows of the giants does to one's public image and perception. 

"We probably have as many outsourcing contracts as IBM and EDS," one HP insider told Annex.  "But they are mostly smaller deals."  So they don't come up on the screens of "enterprise watchers." Which means nearly everybody in the business.

Well, having its strength in the small to medium-size companies may prove to be an HP advantage in the long run.  As the Fortune 500 cow is running dry, with no new offspring in sight, many of the IT services giants may be forced to look for greener pastures elsewhere, too.  Which is what we have been harping about for over six years now (see “Louis XIX of Armonk,” Aug. 1996).

Meanwhile, back at CIBC in Canada, the megadeal announced today actually grew out of a joint venture "Intria-HP," formed in 1998 by HP and CIBC to deliver outsourcing services to a number of Fortune 500 companies in North America.  According to the terms of the latest megadeal, HP will acquire CIBC's 51% stake in Intria-HP for an undisclosed amount.  HP will also take over nearly 1,300 people that work in that organization.

The Intria-HP joint venture is actually a classic fit to our March 1990 forecast about the coming industry stratification.  Over 12 years ago, we said that the "best of breed" customers will pair-up with vendors to market new services to other companies in their industry (see Industry Stratification Trend (Mar. 30, 1990),

The HP-CIBC megadeal also puts HP squarely into the large systems  (mainframe) outsourcing arena, which is a new territory for this midsize and PC server vendor. The $1.3 billion contract covers about 600 servers initially totaling about 5,000 MIPS, 40 terabytes of storage, 600 Unix/NT servers, and a small number of AS/400's.  It also includes management of some 29,000 CIBC desktops.

We estimate that the HP services business, including maintenance, accounts for about $15 billion of its $75 billion or so total revenue (post-Compaq).  The outsourcing portion was about $1.5 billion prior to the CIBC deal.  

So in many respects HP is now roughly where IBM was 10 years ago, when it started putting a big emphasis on the Big Blue services - a product company trying to remake itself into a services player. Fortunately for HP, this also means that there is plenty of blue sky ahead, especially in its sweet spot - the small and medium companies market.  No wonder the HP stock was up by almost 2% in early trading following the announcement of the CIBC deal.

 Happy bargain hunting!

Bob Djurdjevic


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Volume XVIII, Annex Newsflash No. 2002-15
September 17, 2002

Editor: Bob Djurdjevic
Published by Annex Research

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