May 13, 2008

Business news - HP adds EDS in challenge to IBM

HP buys services EDS and now goes head-to-head with IBM in services consulting side of business.

source link on WSJ

H-P Agrees to Buy EDS,
In Challenge to Rival IBM
May 13, 2008 8:15 a.m.

Hewlett-Packard Co. on Tuesday unveiled its deal to acquire Electronic Data Systems Corp. for about $12.8 billion, as it said fiscal second-quarter results beat analysts' expectations and raised its fiscal-year outlook.

The all-cash deal, which is expected to close in the second half, would unite two of the most storied names in computing. The price of EDS, at $25 a share, represents premium of more than 30% from where EDS's stock was trading before The Wall Street Journal reported the talks Monday afternoon.

EDS shares closed Monday at $24.08, and rose 0.7% to $24.26 in premarket trading Tuesday. H-P shares fell 2.8% to $45.52 after dropping 5.1% Monday.

A deal would make H-P the world's second-largest provider of technology services after International Business Machines Corp. EDS's 137,000 employees run computer servers and mainframes, manage corporate help desks and process data for everything from credit cards to airline tickets.

The deal is expected to add fiscal 2009 non-GAAP earnings and to 2010 net income, with "significant synergies" expected.

As part of the deal, H-P would establish a new business group, to be branded "EDS -- an H-P company," and headquarter at EDS's existing offices in Plano, Texas. EDS will continue to be led after the deal closes by Chairman, President and Chief Executive Officer Ronald A. Rittenmeyer, who will join H-P's executive council.

The move is a complicated strategic gambit for H-P Chief Executive Mark Hurd. H-P already is a sprawling conglomerate that is the world's largest maker of personal computers, with a market capitalization of $115 billion. Now it would have to digest a large company with a starkly different culture than its own.

"The combination of H-P and EDS will create a leading force in global IT services," said Mr. Hurd. "Together, we will be a stronger business partner, delivering customers the broadest, most competitive portfolio of products and services in the industry. This reinforces our commitment to help customers manage and transform their technology to achieve better results."

With the broader technology industry maturing, companies have found it more difficult to grow than in the past years. An H-P acquisition of EDS could spark a run of tech-industry mergers, as the Palo Alto, Calif., company's major rivals react to the deal.

The combined company would be able to trim overhead costs, while allowing H-P to sell more servers and workstations to EDS's consulting clients. That is largely been the model for IBM, which is clearly the competitive target behind the potential acquisition. IBM controlled 7.2% of the tech-services market last year, according to research firm Gartner Inc. EDS was a distant second at 3%, while H-P was fifth, with a 2.3% share.

Separately, H-P said net income on a preliminary basis rose for the quarter ended April 30 to 80 cents a share from 65 cents, with earnings excluding acquisition costs rising to 87 cents a share from 70 cents a share. Revenue rose 11% to $28.3 billion.

The company, which was slated to release its quarterly results Thursday but pushed the release date to next Tuesday, had projected earnings between 83 cents and 84 cents on revenue of $27.7 billion to $27.9 billion.

For the fiscal year, H-P raised its earnings view by four cents to $3.54 to $3.58 a share, and now expects revenue of $114.2 billion to $114.4 billion, up from the prior estimate of $113.5 billion to $114 billion. Analysts were looking for $3.52 and $114 billion, respectively. For the third quarter, H-P expects earnings excluding items of 82 cents to 83 cents a share on revenue of $27.3 billion to $27.4 billion. Analysts forecasted earnings of 82 cents on revenue of $27.35 billion.

Posted by staff at May 13, 2008 09:03 AM