HP Drags Down Dow

HP (NYSE: HPQ) shares tumbled 5.5% Tuesday, for a two-day drop of more than 10%, on worries that the company is overpaying for EDS (NYSE: EDS).

Since the deal combines a fast-growing, high-margin tech sector darling with a slower-growing, low-margin services company, investors have good reason to worry. HP will be hard-pressed to achieve anything like its historic growth rate with the addition of EDS.

HP has averaged 13% sales growth over the last five years and gross margins of 24%. Over the same time, EDS has grown revenues at a 1.6% rate and achieved gross margins of 11%, according to Reuters Fundamentals.

CEO Mark Hurd has been wildly successful in boosting HP’s growth and profitability, but he faces a daunting challenge if he hopes to do the same at EDS. Based on the early returns, investors and analysts have their doubts. HP even pre-announced better than expected quarterly results and reaffirmed current quarter guidance, but its shares still fell. The company will announce full results next week.

And IBM (NYSE: IBM) investors didn’t seem too worried about the new competition, sending Big Blue shares 1% higher to a new all-time high.

Stocks were mixed Tuesday, with the Nasdaq posting a modest gain and the Dow losing ground on weakness in HP, GM (NYSE: GM), Wal-Mart (NYSE: WMT) and financial stocks.

Yahoo (NASDAQ: YHOO) rose 5% on reports that billionaire investor Carl Icahn may launch a proxy fight against the company to try to force a deal with Microsoft (NASDAQ: MSFT).

Brocade (NASDAQ: BRCD) gained 8% ahead of its results due out late Wednesday.

Clearwire (NASDAQ: CLWR) rose 7% on its quarterly results.

After the close, Applied Materials (NASDAQ: AMAT) shares rose after the company beat estimates but predicted weakness in chip equipment spending.

The Nasdaq rose 6 to 2495, the S&P slipped half a point to 1403, and the Dow fell 44 to 12,832. Volume rose to 4.02 billion shares on the NYSE, and 1.9 billion on the Nasdaq. Advancers led by a 17-15 margin on the NYSE, and 15-13 on the Nasdaq. Upside volume was 53% on the NYSE, and 59% on the Nasdaq. New highs-new lows were 212-75 on the NYSE, and 79-95 on the Nasdaq.

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