HP’s acquisition [1. Definition in quotes courtesy investopedia.com] of EDS for a whopping $13.9 billion came as a surprise to many. This is the second largest deal for HP after it acquired CompaQ for a mind boggling $25 billion in 2001. But what could this deal hold for both HP intrigues most of the observers as HP diversifies into a unrelated domain of Software Services.

One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies – at least, that’s the reasoning behind M&A.

Lets us try to understand HP’s dominion and then evaluate how the deal affects HP. HP operates under three main business groups namely Imaging & Printing Group (IPG), Personal Systems Group (PSG) and Technology Solutions Group (TSG).

The IPG, which includes printers, scanners, cameras and other accessories, contributes a bit to HP’s revenues by its captive marketing (sell Printer cheap and charge heavily for the Cartridge). And with very little competition coming from other players, HP seems to be well of in the imaging business.

The HP’s PSG, which includes desktops, personal and professional laptops, has been bolstered by the CompaQ acquisition in 2001. But with the passage of time this competitive advantage has been lost and though HP professional laptops have been a preferred choice for most professionals, its personal laptops and computers came under relentless pressure from competition. To counter this pressure, HP came up with “The Computer is personal again” Campaign. This campaign not only bolstered HP’s brand image, but also raked in handsome returns purely on a excellent marketing maneuver.

The TSG, which is the server and storage devices business, is where HP is an under dog. The ‘Big Blue’ IBM has been ruling the roost in the main frames, servers and storage device business for many years now, though the other players are catching up. The EDS acquisition would enhance HP’s influence on the value chain in the servers and storage devices business.

HP also senses a huge opportunity in the rapidly growing Software Services business where-in the IBM-Accenture duo has been dominating despite a sluggish economy. The HP-EDS combo want a share in Software Services pie and the consolidation seems to be the best way to get it done.

Thus the EDS acquisition is HP’s claim of being ‘the very best in business’ and halves the gap between HP and IBM from $27.3 billion to $ 13.4 billion. More importantly, it has facilitated HP’s presence in almost all the businesses in which IBM operates thus giving HP a chance to go head-on with ‘The Big Blue’ IBM for the much coveted number one spot.