Last year's model

As a spate of major IT services acquisitions were announced in recent months, IBM Corp. watched from the sidelines, perhaps feeling just a little smug, since it is the one being chased by this flurry of dealmaking activity.

In rapid succession this September, struggling PC maker Dell Inc. said it would pay $3.9 billion for Perot Systems Corp., and Xerox Corp. agreed to buy Affiliated Computer Services Inc. for $6.4 billion. Hewlett-Packard Co. is a few steps ahead, having bought Electronic Data Systems Corp. for $13.9 billion a little more than a year ago.

Depending on whom you ask, these deals are either desperate attempts by struggling makers of low-margin hardware technology to boost sales of their PCs, servers and document-imaging machines or efforts to create world-class providers of technology services to the biggest, most complex and most demanding enterprises.

Armonk, N.Y.-based IBM undoubtedly is the farthest along in its evolution from a machine maker to a dominant force in undertaking major enterprise IT projects. The tech giant has been in the forefront of IT services M&A and has been extremely shrewd in its approach, even though it has been organically building its prowess in this area for decades. IBM bought the consulting arm of PricewaterhouseCoopers LLP seven years ago for $3.5 billion, but only after HP had tried to buy the unit for 5 times as much two years earlier (IBM said it couldn't justify that lofty valuation).

That said, IBM executives might argue that the company's software dealmaking has provided the most critical building blocks for its services offerings, and have been happy to point out Dell's, Xerox's and even HP's big moves in the sector are based on impossible wishes to follow the IBM playbook.

The majority of the roughly 80 acquisitions IBM has closed this decade were in software; only Microsoft Corp. is bigger in software, says Alan Ganek, chief technology officer and vice president of strategy for IBM's software division.

Chiefly through acquisitions, IBM has become the largest middleware provider in the industry by a significant margin, he adds. Middleware forms the behind-the-scenes infrastructure that applications and business processes run on and provides components IBM can use to customize its services.

Negotiations with a client about which servers or storage devices to employ in an installation is a "much lower-level discussion" than how to develop a cohesive, fully integrated solution to its problems, and that's where software comes in, Ganek argues, adding that IBM invests $6 billion in software and services R&D annually. "If you have built a technology stack that enables you to supply superior solutions, you can proudly recommend your technology," he says. "If your tech stack is off-the-shelf commodity stuff, then there really isn't added value."

Palo Alto, Calif.-based HP has a growing line of software offerings, much of it gathered through acquisitions, but it can't compare with IBM's. HP also is a relative newbie to the IT services world, though it is miles ahead of Dell and Xerox. Even before acquiring EDS, HP operated a $16 billion services organization. Now it brings in roughly $40 billion in annual revenue through IT services.

By comparison, Dell and Perot combined will have $8 billion in annual services revenue, while Xerox will have a $10 billion IT services operation (excluding office equipment maintenance contracts), according to market intelligence firm International Data Corp. IBM sits at the top of the heap with about $60 billion in annual IT services revenue.

The EDS integration is still in progress; the company last month dropped the EDS label, opting to call the enlarged business HP Enterprise Services. HP has completed the majority of the planned 20,000 layoffs post-closing and on Nov. 1 was expected to switch the former EDS IT systems over to its own. "We are doing this integration in multiple countries with an employee number well north of 100,000, and trying to do it without crashing the plane," says David Gee, vice president of worldwide marketing, HP Enterprise Services. So far, the potentially significant distraction from integration has been avoided, he says, citing the fact that of HP's top 200 services accounts, only one defected during the integration.

The EDS deal appears to be progressing well, regardless of whether HP is trying to emulate IBM. And, as for using what Ganek refers to as a "decades-old services model," Gee is happy to concede that HP's services professionals prefer to sell its own technology to business clients. "Our intent is always to solution as much of HP's intellectual property as we can -- we make no bones about it," Gee says. "Under no circumstances are we walking in and switching off any [non-HP technology used by a former EDS client], but most clients tell us: 'You're the provider, do what you need to behind the curtain.' "

Indeed, he estimates that the pipeline of EDS business could translate into $4 billion worth of HP technology sales. For a company that once focused tightly on selling printers and PCs, that kind of boost is anything but antiquated.