More On HP's Acquisition Of EDS

WASHINGTON (MarketWatch) - Hewlett-Packard Co. said Tuesday it will buy Electronic Data Systems Corp. for $13.9 billion in a deal that will significantly expand its technology-services business and help HP better compete against International Business Machines.
The combination would make HP-EDS the second largest global provider in IT services after IBM.

EDS generated $22.1 billion in sales in 2007, while HP's services business totaled $16.6 billion in revenue. HP said it will pay $25 a share for EDS and expects the deal to close in the second half of 2008. It added the acquisition should boost its adjusted earnings per share in 2009 and its net profit in 2010. HP and EDS confirmed Monday they were in advanced talks after The Wall Street Journal reported a deal was in the works.

Hurd: Won't slow growth
Both firms provide an array of services to help companies around the world run their networks, manage data and process health and financial information, among other things. IBM now has about a 10% global share, with EDS tied for second at 4% and HP fifth at 3%, Hewlett Packard estimated.
In the past few years, EDS has undergone extensive restructuring to improve its profitability, but the company still has lower margins than HP and is not growing as fast, a situation that concerned some Wall Street analysts.
In a conference call with analysts, HP Chief Executive Mark Hurd said the inclusion of EDS into his company's IT business would not necessarily slow growth. He also said he expects the combination to result in extensive savings, though he declined specify just how much.
What made EDS especially attractive, Hurd said, was its expertise in IT technology. "Frankly, EDS is more mature and more sophisticated with many of the processes that they bring to the market then we are," he said.
HP said it will establish a new business group to be branded EDS, an HP company. EDS will continue to be led by Ronald Rittenmeyer, its chairman and CEO, who will also join HP's executive council.
Credit Suisse analyst Steven Soranno downgraded HP to hold from buy after Monday's media reports but ahead of the deal announcement.
"Strategically, an expanded service presence has high synergistic potential. However, the large size of an EDS acquisition, coupled with the enhanced business risk involved with the business causes us to adjust our rating," Soranno said in a note to clients.

Separately Tuesday, HP said it expects to report fiscal second-quarter earnings of 80 cents a share on revenue of $28.3 billion. Excluding items, it expects second-quarter earnings of 87 cents a share, ahead of the 84-cent consensus forecast