HP-EDS Deal Jars BMC Software

BMC Software and other systems integrators view HP as a competitor after the mega merger.
By Ivy Lessner ,

SAN FRANCISCO - BMC Software (BMC) expects to profit from Hewlett-Packard's (HPQ) - Get Report move into the outsourcing business.

H-P's acquisition of

Electronic Data Systems

(EDS)

, announced Tuesday, puts both companies in competition with their traditional business partners.

Like many vendors, BMC is now faced with losing some business to H-P. However, the Houston-based software developer is positioning itself as the neutral middleware developer to which independent integrators can turn instead of H-P.

Following

its fourth-quarter outperformance disclosed late Thursday

, BMC's stock jumped $2.81, or 7.7%, to $39.24 in early trading Friday, before falling back to $38.74. BMC posted annual revenue of $1.73 billion for the fiscal year just ended.

Both Lehman Brothers and Oppenheimer raised their one-year price targets on BMC Friday to $43 from $40. And Goldman Sachs raised its target to $41 from $37.

"H-P has historically been positioned as an agnostic partner," to a customer's choice of equipment, software or integrator, BMC CEO Bob Beauchamp said in an interview. "With the EDS announcement, they've essentially said 'we don't need any of you.'"

H-P declined comment Friday.

In a horizontal business model, systems integrators such as

Accenture

(ACN) - Get Report

and EDS typically provide both outsourcing services and system packages consisting of hardware and software from a variety of vendors, including HP.

Although integrators may have preferred-vendor alliances, they typically remain neutral, allowing their clients to specify the hardware and software brands of their choosing.

The exception to this model has been outsourcing and services leader

IBM

(IBM) - Get Report

, which works with competing vendors but has built a successful business model primarily by integrating its own hardware, software and outsourcing services.

By buying EDS, H-P, a hardware vendor with a growing portfolio of middleware, is emulating IBM's vertically integrated business model. But the buyout also makes both H-P a competitor of other integrators, and EDS a

competitor of other equipment and software sellers

it has worked with.

Other integrators and vendors see "that H-P is suddenly much less friendly to them" as it shifts to competing with them in some respects, Beauchamp said. "We hope to capitalize on that."

BMC has to take an aggressive stance, as it sees some of its market opportunity dry up from H-P's move into the outsourcing arena. The company competes with H-P in the market for software that manages IT systems.

"We are much less likely to totally replace the H-P software that EDS has been using," Beauchamp said. But hopefully we'll continue to work with them on software that does not compete."

"I believe we will get some sales as a result of this merger," Beauchamp said. Outsourcers and integrators that were previously neutral toward software vendors, "will now take a position toward BMC," he predicted.

Goldman Sachs analyst Derek Bingham agreed with some of Beauchamp's assessment of the merger. H-P's proposed acquisition of EDS could move third-party integrators away from recommending H-P software and aligning more closely with BMC, he wrote in a note Friday.

But BMC is finding it harder to win against H-P and others, Bingham noted. "Our checks continue to suggest increasing focus and competition from

CA

(CA) - Get Report

, H-P and IBM."

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