HP agrees to buy EDS for $13.9 billion

by Editor 5/13/2008 3:29:00 PM

World's biggest PC maker Hewlett-Packard was reported to be in advanced talks to acquire IT services provider Electronic Data Systems (EDS) yesterday and news about the acquisition, as the Wall Street Journal predicted, arrived as early as today: HP has agreed to buy EDS for $13.9 billion. 

HP chief executive Mark Hurd said:

"The combination of HP and EDS will create a leading force in global IT services. Together, we will be a stronger business partner, delivering customers the broadest, most competitive portfolio of products and services in the industry."

The acquisition will be a tremendous boost to HP's IT consulting arm and more than double its size to produce a new business that will be better equipped to take on International Business Machines Corp. (IBM) as a rival on the IT services market.

Hewlett-Packard has tried for years to challenge IBM in the lucrative field of IT services by improving its technology consulting and data management arms.

In 2000, HP's attempt to buy the PricewaterhouseCoopers' consulting division failed and the PwC consulting business ended up in IBM's hands instead.

“While Hewlett-Packard has over time built up its own outsourcing practice, this clearly is a move by Mark Hurd to challenge IBM in the services area,” said David Garrity, director of research at Dinosaur Securities.

The information technology services market is particularly interesting to HP because experts predict that it will grow more than eight percent annually over the next five years. At the same time, Wall Street analysts predict that HP will grow about five percent.

EDS reported revenue of $22.1 billion last year. The company's main rivals are Accenture and Computer Sciences Corp. (CSC) on the U.S. market and Indian tech giants Tata Consultancy Services (TCS) and Infosys Technologies Ltd. internationally.

In 2007, IBM held 7.2 percent of the share of the technology services market. EDS followed with three percent and HP had 2.3 percent and was fifth overall, according to a Gartner report.

In the last three years, HP has mostly seen its business flourish. Since Mark Hurd came onboard as the new chief executive, the company has overtaken IBM as the largest global technology company and Dell as the world's number one seller of personal computers.

The acquisition of EDS will also help HP yield more government contracts: EDS' government projects are worth about $2.5 billion. The company is among the top 10 government technology contractors in the U.S. and the number one government contractor in the UK.

This will be HP's biggest acquisition since 2002, when the tech giant bought Compaq Computer Corp. for $19 billion.

In the wake of the acquisition talks, EDS shares rose almost 28 percent, while HP's dropped more than five percent, reflecting investors' concerns over the deal.

Commenting on yesterday's reports, an IBM representative said: “Integrating services companies is difficult. And to be competitive today, you have to be globally integrated.”

Echoing the thought, AMR Research analyst Dana Stiffler warned: “Palo Alto versus Plano wrangling will destroy any short-medium term benefit unless there’s a strong integration roadmap.” 

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