HP Confirms Talks To Buy Electronic Data Systems

Acquiring EDS, the world's largest "pure play" outsourcer, would immediately turn HP into a major services firm capable of rivaling IBM.

By Paul McDougall
InformationWeek
May 12, 2008 04:35 PM

In a deal that would create a hardware, software, and tech services powerhouse, Hewlett-Packard (NYSE: HPQ) is poised to purchase outsourcing giant Electronic Data Systems.

In a public statement issued Monday after the stock market closed, the company said it "confirmed that it is engaged in advanced discussions withElectronic Data Systems (NYSE: EDS) Corporation regarding a possible business combination involving the two companies."

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HP added that a deal is not certain: "There can be no assurances that an agreement will be reached or that a transaction will be consummated." The company said it "does not intend to comment further until an agreement is reached or discussions are terminated."

HP provided no further details.

The Wall Street Journal said the deal could be announced as early as Tuesday and also reported that HP might pay between $12 billion and $13 billion to acquire Dallas-based EDS. The newspaper cited unnamed sources familiar with the negotiations.

An EDS spokesman did not immediately return a call seeking comment.

HP shares were up 0.75% to $49.50 in late afternoon trading Monday. EDS shares were up 22.06% to $23.02. HP is scheduled to announce its second quarter earnings on Thursday.

Under former CEO Carly Fiorina, and now under current chief Mark Hurd, HP has struggled to grow its footprint in the lucrative IT services market, which is dominated by IBM. Acquiring EDS, the world's largest "pure play" outsourcer, would immediately vault HP into a major services firm capable of rivaling Big Blue.

HP posted $16.6 billion in total services revenue in 2007, while EDS recorded $22 billion in sales. For its part, IBM recorded $36.1 billion in technology services revenue last year and $18 billion in sales of technology-enabled business services.

If the deal happens, HP could face significant integration challenges.

IBM (NYSE: IBM) in recent years has slimmed down its efforts to focus solely on enterprise hardware, software and services. To emphasize its focus on business customers, the company went so far as to jettison its PC business in 2005.

HP, on the other hand, continues to operate a consumer-oriented personal computer and printing business that accounts for about half of its revenues. It could be difficult for HP to convince blue chip EDS outsourcing customers, such as American Airlines and Bank of America, that their service would not suffer in the hands of a company with such a significant stake in the consumer tech market.

Uncertainty created by an HP-EDS merger could, in the short term at least, play into the hands of IBM and also help several India-based outsourcers, including Wipro, TCS and Infosys, that are expanding their presence in the U.S. market.

On the other hand, HP, with the addition of EDS, could rightfully claim that it's the sole vendor capable of furnishing customers with the entire spectrum of IT products and services -- from PCs to global outsourcing services

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