HP Strikes Deal to Buy EDS for $12.6 Bln - Lucrative Services Business

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. (Click on for more details)

"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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