HP mulls Electronic Data Systems bid

 

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Posted on 13 May 2008 at 08:53

Hewlett-Packard is in talks to buy technology outsourcing company Electronic Data Systems for around $13 billion.

The acquisition would be HP's biggest since its $19 billion acquisition of Compaq in 2002,and would vault it close second to IBM in technology services. Together HP and EDS would have roughly $39.4 billion in services revenue, compared with IBM's $54.1 billion last year.

HP shares fell nearly 5% on the back of the news, amid some scepticism that slow-growing EDS would provide more than a one-time boost, and might not be worth a premium estimated to be as much as 37%.

"While Hewlett-Packard has over time built up its own outsourcing practice, this clearly is a move by Mark Hurd to challenge IBM in the services area," says David Garrity, director of research at Dinosaur Securities, referring to HP's chief executive.

A bigger HP could compete better against International Business Machines Corp in going after large clients and help it keep costs in line, analysts said.

However, scepticism is rife over the deal.

"Unless HP has some synergies where it can dramatically impact earnings growth of EDS, I'm not sure why they'd want to buy it," says Jim Huguet, co-chief executive at Great Companies LLC. "My question is whether it will become a drain on Hewlett-Packard?"

In 2000, HP pulled out of talks to buy the consulting business of PricewaterhouseCoopers for as much as $18 billion. IBM in October 2002 closed its $3.5 billion acquisition of PricewaterhouseCoopers' consulting division.