It is officially announced that Hewlett-Packard Co has agreed to buy Electronic Data Systems Corp (EDS) for about $12.6 billion in cash to build a technology-services company that could challenge IBM.
The companies said today that their boards had unanimously approved the deal, in which EDS shareholders would get $25 per share. That is a premium of almost 25 per cent over what EDS had been trading at on Friday. Word of the talks emerged Monday and it would be HP’s biggest deal in six years.
HP is the world’s largest maker of personal computers, while Texas-based EDS provides technology services to the governments and companies around the world. The sale is expected to close in the second half of this year and more than double HP’s revenue from services, which was $16.6 billion in 2007. EDS had $22.13 billion in revenue last year. Their combined services business would have 210,000 employees, although some analysts expect HP would trim jobs, and operations in more than 80 countries.
HP said the business would be based at EDS’ headquarters in Plano, Texas, and led by EDS chairman and chief executive Ronald A Rittenmeyer. HP said it expects the deal would produce “significant” cost savings and add to earnings by next year.
Palo Alto-based HP and EDS had said on Monday that they were in “advanced discussions” about a possible combination.
The deal would have an enterprise value of $13.9 billion without defining what that included. But based on 502.6 million EDS shares outstanding as of April 25, the acquisition would be worth $12.57 billion. HP ended January with nearly $10 billion in cash and has a market value of about $115 billion. If the deal is completed, it would be HP’s biggest acquisition since it bought Compaq Computer Corp for $19 billion in 2002. That acquisition paved the way for HP to supplant Dell Inc as the world’s largest PC maker.
Buying EDS would give HP more tools to challenge IBM Corp in the lucrative technology services field. HP has already replaced IBM as the world’s largest technology company, based on revenue. The demand for data management and technology consulting services has steadily grown during the past two decades as the automation of corporate America and the rise of the Internet prompted more businesses to hire contractors to help run their computer software and hardware. IBM’s technology services division brought in $54 billion in revenue last year, accounting for half of the company’s total sales. Combined, EDS and HP’s technology services division had about $39 billion in revenue last year.
In one of its biggest previous attempts to expand its technology services, HP attempted to buy PricewaterhouseCoopers’ consulting division in 2000. IBM wound up buying the unit instead. HP has been on a roll since it hired Mark Hurd as chief executive three years ago. Propelled by earnings growth that has consistently exceeded analyst expectations, the company’s stock price has more than doubled since Hurd’s arrival.
Acquiring EDS could yield more government work for HP as EDS is far better connected, with deals worth about $2.5 billion putting it among the top 10 among US government technology contractors. Combined, HP and EDS still would lag significantly behind US government contractors like Lockheed Martin Corp and Boeing Co.