Services Giant: HP Buying EDS

UPDATED: Hewlett-Packard (NYSE: HPQ) 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 competition against rival IBM (NYSE: IBM).

The companies said HP will purchase EDS at a price of $25.00 per share, ranking the deal as HP’s biggest since its $19 billion buy of Compaq in 2002.

The acquisition marks the culmination of several years of effort by HP to expand its service business, and makes a giant in the space even bigger — effectively doubling its revenue from the business, 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, though executives said some reductions may be necessary through the transaction.

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 Ronald A. Rittenmeyer, EDS’ chairman, president and CEO.

The addition of EDS might also catch Sun Microsystems (NASDAQ: JAVA) and Dell Computer (NASDAQ: DELL) flat-footed, because they tap EDS (EDS) for customer service.

“Today’s transaction is compelling strategically and commercially … and it fulfills our stated objective of expanding in the services area,” Mark Hurd, HP’s chairman CEO, said during a conference call this morning.

He added that the deal would expand HP’s offerings especially in areas like application outsourcing and verticals including government and manufacturing.

While the deal could add strength in a few areas, the acquisition won’t significantly change the direction HP is taking in its services unit, Hurd said.

“There’s a tremendous leverage you get from scale,” he said. “Many functions [EDS does] today, we can help them take advantage of that scale.
We’ll run basically the same playbook as we [did] at HP. None of the synergies here are anything more than we’ve done at HP.”

Moreover, executives from both companies said they expect the deal would enhance HP’s service arm without significantly cannibalizing either company’s existing relationships or capabilities.

Added Rittenmeyer, “the [customer] overlap is actually not very extensive. There are some customers where we are in the same space but they are very few and far between. We are very complementary in the space today.”

Executives also said two companies have also worked together either jointly servicing clients or in other relationships.

The services sector is relatively stable and offers much higher margins than the commodity PCs and printers that a
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.

Next steps for HP aren’t yet clear. Even after agreeing to shell out close to $14 billion for EDS, HP’s Hurd suggested that the company may not be finished looking for deals to grow its services business.

“We can’t do everything with HP’s portfolio [alone] so we’re going to need all kinds of partners to get our work done,” Hurd said.

Despite the assertion, Hurd waved away any discussion of additional acquisitions in the services space.

“We’re going to focus on getting this one right,” he said.

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 (NYSE: ACN) and Computer Sciences Corp.
(NYSE: CSC), as well as from Cognizant Technology Solutions (NASDAQ: CTSH) and Indian rivals Infosys Technologies (NASDAQ: INFY), Tata Consultancy Services (NASDAQ: TCS).

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

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.

Those trends continued into morning trading, with shares of EDS up 1.54 percent at $24.45 by press time, while HP continued slipping, trading down
6.04 percent at $44.04.

Update adds comments from Hurd and Rittenmeyer. Richard Adhikari contributed to this story.

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