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Hewlett-Packard buys EDS

New York, May 13 (Reuters): Hewlett-Packard Co (HP) has struck a deal to buy Electronic Data Systems Corp (EDS) for $12.6 billion, seeking to boost its technology services business to better compete against market leader IBM.

The companies said the deal valued EDS at $25 per share, a 33 per cent premium to its closing price on Friday, before reports of merger talks sent the shares soaring on Monday.

“They are getting EDS, which I think is a pretty good company, for a pretty beaten-down stock price,” said Matt McCall, president of Penn Financial Group.

“We’re going to start seeing more, I believe, of these strategic deals where it’s not private equity coming, but it’s big companies — such as Microsoft trying to go after Yahoo — who have cash on their books and see beaten-down stock prices,” he said. “And just like investors, (they) should be taking advantage of that.”

The companies said the deal was worth $13.9 billion including debt.

The acquisition, expected to close in the second half of 2008, will more than double HP’s services revenue, which amounted to $16.6 billion in fiscal 2007, the companies said.

Combined, their services businesses have annual revenue of more than $38 billion and 210,000 employees and do business in more than 80 countries, the companies said.

HP expects the deal to boost its adjusted fiscal 2009 earnings and its fiscal 2010 net earnings.

HP shares fell 2 per cent to $45.89 in pre-market trading after losing nearly 5 per cent on Monday. EDS shares rose 1 per cent to $24.39 after gaining nearly 28 per cent on Monday.

“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,” said 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.

“It would put Hewlett-Packard in the sweet spot of an IT spending trend. It would definitely improve their position against IBM,” said CRT Capital Group analyst Ashok Kumar.

HP has long considered an acquisition to beef up its tech services business, a sector that offers relatively stable income and high margins even in an economic downturn.

PC trends

Worldwide computer services revenue rose 10.5 per cent to $748 billion in 2007, according to data released on Monday by market research firm Gartner Inc.

IBM continued to be the leader, with a 7.2 per cent share. EDS weighed in at No. 2, with 3 per cent of the market, while HP was No. 5, with 2.2 per cent market share.

Together HP and EDS would have roughly $39.4 billion in services revenue, compared with IBM's $54.1 billion last year.

“HP gains a very strong No. 2 position in total services market share and professional services market share behind IBM,” said Gartner analyst Allie Young.

If EDS were to remain independent it would have a tough time holding on to its No. 2 slot in IT services market, Young said.

EDS brings to HP a strong base in infrastructure outsourcing, Young said. But neither HP nor EDS is strong in high-end consulting, which is a strong suit for IBM.

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