HP-CSC deal could be on

Rumours suggest HP may take a minority stake in a private equity firm's bid for services giant CSC

HP chief Hurd "de-emphasised" services

Rumours of a merger between HP and CSC continued to swirl this week as analysts said that a low-risk deal could make sense.

According to recent reports, private equity firm Blackstone Group could lead a bid with HP to acquire CSC, one of the world's largest outsourcing companies. The reports suggest HP would take only a minority stake in the deal.

Some watchers said that a softly-softly approach to taking over CSC could help calm HP's fears over a repeat of the troubled combination with Compaq.

"While a joint HP and CSC is certainly not a match made in heaven, it is arguably the best option to come along yet," said Chad Hersh of analyst firm Celent, and a former member of CSC's staff.

"What makes the HP deal more attractive ... is that HP would initially take a minority interest in the deal. The great thing for HP is that they get to date CSC before marrying them."

Blackstone's involvement could be in line with experts' views that equity groups could play a large role in taking services firms private. Last year, Silver Lake Partners acquired SunGard Data Systems, for example.

CSC has also recently been linked with the possibility of a merger with Lockheed Martin while Blackstone has been reported to be seeking to buy another IT services firm, ACS.

Any deal between HP and CSC could recast the UK services landscape and provide an even more powerful competitor for IBM and EDS.

However, some analysts said that the CSC merger stories do not sit well with new HP chief executive Mark Hurd's conservative approach.

"When we met Hurd only a few weeks ago, he displayed no desire to increase HP's consulting capability ... nor did he try to prepare any conceptual ground for such a disruptive move," noted Ovum Holway's Eamonn Kennedy. "If anything, he de-emphasised the role high-value services will play in his HP in the near-term."

More broadly, Celent's Hersh said there is a prospect for equity firms to roll up services firms. There is "the potential to merge numerous available mid-sized players into a large player," he added in an email exchange with IT Week.

"One good-sized deal could trigger a chain reaction," Hersh argued, "as competitors scramble to keep pace in these businesses, which rely on economies of scale."

Computer Associates made a failed attempt to acquire CSC in 1998.