HP to acquire EDS for $13.9 billion

Date: 15-05-2008
Source: USA Today

Hewlett-Packard on Tuesday said it will buy consulting firm Electronic Data Systems for $13.9 billion, including debt, an acquisition that will allow the computer giant to better compete with rival IBM.

The deal is a "reverse merger" that keeps EDS largely intact, says Shane Robison, HP's chief strategy officer. HP's consulting unit, which has about 70,000 employees, will be rolled into EDS, which has about 140,000 employees. The combined entity will be known as "EDS -- an HP company."

EDS CEO Ronald Rittenmeyer will run the new division. It will be based at EDS' Plano, Texas, headquarters, about 1,700 miles from HP's main office in Palo Alto.

Layoffs are expected. "We're looking to streamline our overhead," Robison says.

The new EDS will have about $38 billion in revenue and 5% of the fractured consulting services market, says researcher Gartner. IBM's legendary consulting division has about 7% of the market. "IBM is a formidable competitor, but the industry desperately wants a credible No. 2," Robison says.

HP will pay $25 for each EDS share, stock option and restricted stock unit. HP will also assume about $3.3 billion in debt, while obtaining some cash and minority interests. (these amounts are included in the $13.9 billion purchase price) The deal is expected to close in the second half of the year.

The news sent EDS shares up 1% Tuesday to close at $24.34. They jumped 28% Monday after HP revealed the negotiations. HP shares dropped 5.5% Tuesday to $44.27. "It certainly makes sense," says Gartner tech analyst Allie Young. HP reaches thousands of business customers with its hardware and software products. EDS has greater expertise in business services. Together, "They could sell more services deals," she says. Economies of scale could also help cut costs. That's a concern for EDS, which has had accounting and profitability problems in the past. One of the biggest issues: a multibillion-dollar contract with the U.S. military that became a big money-loser.

Robison says HP has spent more than 10,000 hours digging through EDS' financials. "We're very comfortable with the work they've done in the past two years to improve their cost structure," he says.

The acquisition is HP's largest since Compaq Computer in 2002. The "size looks daunting," American Technology Research equity analyst Shaw Wu said in a research note. HP's skill at combining the two companies will determine whether the deal is a success, Young says.

Also Tuesday, HP released preliminary results for its second fiscal quarter. Revenue was $28.3 billion, up 11% from a year ago, thanks to "solid performance across HP's business segments," the company said. Earnings rose to 80 cents a share from 65 cents a year ago.

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