HP Strikes Deal to Buy EDS for $12.6 Bln

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Look out IBM, HP is gunning for you.

NEW YORK (Reuters) - Hewlett-Packard Co has struck a deal to buy Electronic Data Systems Corp for $12.6 billion, seeking to boost its technology services business to better compete against market leader IBM.

Some Wall Street analysts were critical of the deal, which would be HP's biggest since its $19 billion purchase of Compaq in 2002. They said HP was paying a rich premium for a slow-growing business, even if EDS would vault it to second place behind International Business Machines Corp in services.

The deal values EDS at $25.00 per share, a 33 percent premium to its Friday closing price, before reports of talks sent the stock soaring on Monday. Including debt, the deal's enterprise value was $13.9 billion, the companies said.

"I would say the deal, in my view, is a little pricey but we'd have to look at the details," said Jeff Embersits, chief investment officer of Shareholder Value Management, which owns HP shares.

He said the key was how EDS would be integrated to make it a more profitable business.

"Mark's working with a five-year plan. So this will probably look a lot smarter in two or three years, but it could be a tough year," he said about HP Chief Executive Mark Hurd.

HP said it expects the deal to close in the second half of 2008, and boost its adjusted fiscal 2009 earnings and fiscal 2010 net earnings.

HP also reported better-than-expected preliminary quarterly results on Tuesday and raised its fiscal 2008 outlook, which it said did not include any potential impact from the EDS deal.

The acquisition will more than double HP's services revenue, which amounted to $16.6 billion in fiscal 2007. The combined services businesses will have annual revenue of more than $38 billion and 210,000 employees, the companies said.

That compared to IBM's $54.1 billion in services revenue last year.

HP shares fell more than 5 percent to $44.30 in early New York Stock Exchange trading after losing nearly 5 percent on Monday. EDS shares rose 1.5 percent to $24.45 after gaining nearly 28 percent on Monday.

This article was originally published on 2008-05-13
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