Along with the announcement that Booz Allen will split, selling the majority of its government business to Carlyle Group, HP's $13.9 billion purchase of EDS created quite a stir in financial markets this week. Most analysts point to HP's desire to make a strategic play into services to match IBM's solutions model, while some point out EDS's struggles to grow and lagging stock price as making the deal attractive. The deal will certainly make waves in both the commercial and government sectors.

On the Federal Market side, EDS had already been besting IBM in prime contract obligations according to FPDS data below, and the addition of HP's Federal obligations -- while not rounding error -- does not vault them into the ranks of major IT services players such as CSC and SAIC.

Source: FPDS, INPUT

The combination does bring synergy across some major Federal agencies. The chart below shows relative obligations at major agencies, but it does not include EDS's $1.76 billion in 07 obligations at the Navy, their biggest customer (where HP adds another $24 MM).

Source: FPDS, INPUT

In a market where domain experience and relationships are key to maintain control over allocated dollars, the new "EDS -- an HP Company" should be able to consolidate some competitive positions assuming they can navigate the integration of two workforces.

While the Booz and HP moves were expected to some extent, many are wondering whether these mega-mergers will lead to others, especially in the government space. Some analysts are saying "don't hold your breath", citing the credit crisis and lack of participation by Private Equity players. The government M&A market, however, may continue to churn. We have been tracking significant activity so far this year, and given INPUT's forecast of less than stellar growth in the Federal IT market in the coming years, we believe companies will be looking to M&A to fill revenue gaps. Other product firms may look to make a move in the Federal space by acquiring a service provider such as Harris Corp. And, we wouldn't surprised to see the emergence of some Private Equity roll-ups of medium sized firms. Finally, a major foreign player may take the opportunity of the weak dollar to enter the market much as Canada's CGI did. Thus, we feel comfortable with our prediction of 2008 as the year of the buyout in the Federal space.