Hewlett-Packard Co is in talks to buy technology outsourcing company Electronic Data Systems Corp for $12 billion to $13 billion in a deal which would vault it to a close second to IBM in technology services. The acquisition would be HP's biggest since its $19 billion acquisition of Compaq in 2002. Shares of EDS rose nearly 28 percent, taking its market value to about $12 billion. HP shares fell nearly 5 percent amid some skepticism that slow-growing EDS, still considered in turnaround mode, would provide more than a one-time boost, and might not be worth a premium of as much as 37 percent.
A source briefed on the matter told Reuters about the talks and that the plan was to announce a deal by the close of Tuesday. The Wall Street Journal first reported the discussions, and later HP and EDS both said they were in talks about a business combination but gave no details.
"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, referring to HP's chief executive. A bigger HP could compete better against International Business Machines Corp in going after large clients and help it keep costs in line, analysts said. If HP completes the acquisition, it would be by far the largest under CEO Hurd.
HP has long considered an acquisition to beef up its tech services business, a sector that offers relatively stable income and high margins even in an economic downturn. Worldwide computer services revenue rose 10.5 percent to $748 billion in 2007, according to data released on Monday by market research firm Gartner Inc. IBM continued to be the leader, with 7.2 percent share. EDS weighed in at No. 2, with 3.0 percent of the market, while HP was No. 5, with 2.2 percent market share. Together HP and EDS would have roughly $39.4 billion in services revenue, compared with IBM's $54.1 billion last year.
If EDS were to remain independent it would have a tough time holding on to its number 2 slot in IT services market, Young said. EDS brings to HP a strong base in infrastructure outsourcing, Young said. But neither HP nor EDS is strong in high-end consulting, which is a strong suit for IBM. Yet there was some skepticism about HP's target, EDS.
In April, EDS reported a 62 percent decline in first quarter profit, though the results had topped Wall Street expectations. Despite the beat, analysts said EDS faced intense competition from Indian rivals and saw little catalyst for growth. "Growth could temporarily stall but then the opportunity is for the merged operations to be extremely strong and competitive," Young said. Besides HP and IBM, EDS also competes with Accenture Ltd and Computer Sciences Corp in the United States, as well as Indian companies Infosys Technologies Ltd, Tata Consultancy Services Ltd and Cognizant Technology Solutions Corp.
In 2000, HP pulled out of talks to buy the consulting business of PricewaterhouseCoopers for as much as $18 billion. IBM in October 2002 closed its $3.5 billion acquisition of PricewaterhouseCoopers' consulting division.
