HP Strikes Deal to Buy EDS for $12.6 Bln - Lucrative Services Business (
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LUCRATIVE SERVICES BUSINESS
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.
Worldwide computer services revenue rose 10.5 percent to $748
billion in 2007, according to data released on Monday by market
research firm Gartner Inc.
But analysts on a conference call with Hurd questioned the choice of
EDS, which brings a strong base in infrastructure outsourcing but --
like HP -- is not strong in the high-end consulting business that is a
strong suit for IBM.
EDS is also a company that is still seen to be in a turnaround mode,
facing intense competition from Indian rivals like Infosys Technologies
Ltd and Tata Consultancy Services Ltd, as well as U.S. competitors
Accenture Ltd and Computer Sciences Corp.
"I guess what is troubling, Mark, is it is a high opportunity cost
in terms of spending $13 billion, $14 billion, and what other assets
you could have bought because capital is not limitless, particularly
going in different areas such as software," Bank of Montreal analyst
Keith Bachman said.
Hurd responded: "Obviously people are free to look at it as they
choose and I respect opinion. We expect this deal to be more accretive
risk-adjusted than a large stock buyback."
Analysts said the deal is likely to spark a round of consolidation
as suddenly much-smaller rivals like Infosys, Tata Consultancy, Wipro
and Cognizant Technology Solutions, scramble to stay competitive.
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"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," said Matt McCall, president of
Penn Financial Group. "And just like investors, (they) should be taking
advantage of that."
HP intends to establish a new business group called EDS that will be
headquartered at EDS's existing executive offices in Plano, Texas, and
led by EDS Chairman, President and CEO Ronald Rittenmeyer who report to
Hurd.
(Writing by Tiffany Wu; Additional reporting by Ritsuko Ando and Ellis Mnyandu; editing by John Wallace and Maureen Bavdek)
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