Services Giant: HP To Buy EDS

HP is buying services company EDS in a merger deal valued at $13.9 billion. The acquisition cements HP as an IT powerhouse and steps up its competitive fire against rival IBM. The companies said HP will purchase EDS at a price of $25.00 per share, or an enterprise value of approximately $13.9 billion.

According to an HP press release, the terms of the transaction have been unanimously approved by the HP and EDS boards of directors. The transaction is expected to close in the second half of calendar year 2008.

The deal makes a services giant even bigger, effectively doubling HP’s services revenue, which amounted to $16.6 billion in fiscal 2007. The companies said combined revenues for both services businesses were $38 billion. Head count at the two companies is 210,000 employees across more than 80 countries.

HP said it intends to maintain the EDS brand by establishing a new HP company division headquartered at EDS’s existing executive offices in Plano, Texas, and led by EDS’ Chairman, President and Chief Executive Officer Ronald A. Rittenmeyer.

The addition of EDS might also leave Sun Microsystems and Dell Computer flat-footed, because they tap EDS for customer service. The services sector is relatively stable and offers much higher margins than the commodity PCs and printers that are a huge source of HP’s revenue.

HP has been searching for acquisitions to help it boost its service revenues. In 2000, it terminated talks under then-CEO Carly Fiorina to buy the consulting business of PricewaterhouseCoopers (PWC) for about $18 billion. Instead, HP formed a marketing alliance with PWC to sell supply chain software and create an Aviation Solution Center through which the two would offer business solutions for aviation companies.

Two years later, IBM paid $3.5 billion in cash and stock for the global management consulting and technology services unit of PWC.

The news of the impending deal late yesterday drove EDS shares nearly 28 percent higher to $24.13 on the New York Stock Exchange, and pushed HP shares down by nearly five percent to $46.74.

EDS might also find its footing again with HP as its corporate parent. In addition to a 62 percent drop in first-quarter profits, it faces intense competition from IBM, Accenture and Computer Sciences Corp., as well as from East Indian rivals Infosys Technologies, Tata Consultancy Services, and Cognizant Technology Solutions.

Over the past year, EDS’ shares had fallen more than 32 percent in value, while HP’s had risen only 3.5 percent.

The acquisition ranks as HP’s biggest since its $19 billion buy of Compaq in 2002.

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