HP's EDS deal could spark M&A in tech services

By Sumeet Chatterjee and Jim Finkle

BANGALORE/BOSTON (Reuters) - Hewlett-Packard Co's (HPQ.N: Quote, Profile, Research, Stock Buzz) deal to buy Electronic Data Systems Corp (EDS.N: Quote, Profile, Research, Stock Buzz) is expected to spark a round of consolidation in the global technology outsourcing sector, as suddenly overshadowed rivals scramble to stay competitive.

Analysts said India's Infosys Technologies Ltd (INFY.BO: Quote, Profile, Research, Stock Buzz) (INFY.O: Quote, Profile, Research, Stock Buzz), Tata Consultancy Services Ltd (TCS.BO: Quote, Profile, Research, Stock Buzz), Wipro Ltd (WIPR.BO: Quote, Profile, Research, Stock Buzz)(WIT.N: Quote, Profile, Research, Stock Buzz) and Cognizant Technology Solutions Corp (CTSH.O: Quote, Profile, Research, Stock Buzz) may now be forced to look for acquisitions to compete with a combined HP and EDS, and boost flagging profit growth.

Meanwhile in the United States, analysts also expect the industry to trend toward consolidation though the pace could be slower as players like International Business Machines Corp (IBM.N: Quote, Profile, Research, Stock Buzz) and Accenture Ltd (ACN.N: Quote, Profile, Research, Stock Buzz) are in stronger positions.

"Businesses of companies like Infosys and Wipro are under pressure, as their rivals like IBM and Accenture have really learnt how to be competitive even in a sluggish economy," said Avinash Vashistha, CEO of outsourcing consultancy Tholons.

"This merger, if it happens, will only make (the) situation worse for them by potentially creating a third competitor," he said. "Now, it has become imperative for them to make acquisitions to fill the gap in their services portfolio and get a global footprint. If they don't go for inorganic growth at this stage, they will clearly be at a competitive disadvantage."

HP struck a deal to buy EDS for about $12.6 billion, which would vault it to second place, behind IBM, in tech services -- a sector that offers relatively stable income and high margins even in an economic downturn.

EDS has some 27,000 workers in India after buying 62 percent of MphasiS, a Bangalore-based IT outsourcing company, in 2006. Prior to that EDS only had 3,000 workers in India.

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