HP-EDS Merger to Challenge IBM in IT Services

Industry sources have confirmed to eWEEK that Hewlett-Packard will acquire Electronic Data Systems for about $13 billion.

The announcement may come as early as May 14, the source told eWEEK. HP acknowledged the news first earlier May 12.

"There can be no assurances that an agreement will be reached or that a transaction will be consummated," HP said in a statement. "HP does not intend to comment further until an agreement is reached or discussions are terminated."

EDS's response came about an hour later, also in the form of a statement.

"In response to market rumors, Electronic Data Systems Corporation announces that it is in advanced discussions regarding a possible business combination transaction with Hewlett-Packard Company. The company does not intend to comment further unless and until a definitive agreement has been entered into. There can be no assurance that a definitive agreement will be entered into," the EDS statement read.

The impending deal would make the newly merged company worth about $22 billion and put it on a level with IBM, the largest IT services company in the world. EDS is the world leader in outsourced IT services; HP provides outsourced services too, but focuses mostly on hardware, software and associated services.

IBM Global Services has revenues of about $11 billion per quarter. A combined HP-EDS would bring in roughly the same amount in service revenue. The global IT services market has been estimated to be worth from $40 billion to $50 billion.

The rumor sent EDS shares up 28 percent to $24.13 in after-hours trading on the New York Stock Exchange. HP shares closed at $46.83, down 4.7 percent.

EDS has a market value of about $10.5 billion. However, the company in April reported a 62 percent drop in profits for the first quarter to $62 million. First-quarter revenue rose 3 percent to $5.37 billion.

Melding the two IT giants could prove complicated. Many people saw the failed Microsoft-Yahoo deal as a clash of cultures; this one could be only slightly less problematic.

Both HP and EDS are old-line IT services companies with a long history of working with the largest enterprise and government customers. But HP, under CEO Mark Hurd, has regrouped and steadily modernized after the troublesome Compaq merger of 2002, resulting in strong growth, particularly in the fields of storage, servers and the midmarket. Meanwhile, EDS has had to retrench in recent quarters by offering early retirements and by outsourcing jobs overseas to shore up profitability.

HP has invested heavily in its server and storage businesses and is making a concerted move—more so than many companies of its size and scope—into the midmarket. Early signs indicate that it is finding success, even though its large product catalog and various marketing messages have been difficult to coordinate.

Click here to read more about what the EDS deal would mean for HP. 

HP, which employs about 172,000 full-time employees, was founded by Stanford grads Bill Hewlett and David Packard in Palo Alto, Calif. in 1947. The company recorded $107.7 billion in revenue in 2007, making it the first IT firm to report revenues exceeding $100 billion.

EDS, based in Plano, Texas, was founded by billionaire and former presidential candidate Ross Perot in 1962. General Motors acquired EDS from Perot in 1984, spun it off again as an independent company in 1996 and became an EDS client. EDS employs about 139,500 full-time people in 58 countries, and reported revenues of $24 billion in 2007. It is ranked as one of the largest service companies on the Fortune 500 list.

A merger could prove to be expensive and time-consuming. There will be a measure of overlap in some of the service lines, especially in data center services, software application services, and hardware installation and maintenance services.

"If HP wasn't considered much of an outsource-services-type company before, it's really one now," Brian Babineau, an analyst for Enterprise Strategy Group, told eWEEK.

"This deal really allows HP to scale up on its outsourcing, which is basically all EDS does. The integration of the two companies will be interesting, although I see EDS becoming its own division under HP's TSG [Technical Solutions Group], alongside HP Software, the server and storage business, and their associated services group," Babineau said.

As far as overlapping services are concerned, he said, "that's probably part of the final decision-making that's going on right now—who goes, and who stays."

Together, without any layoffs, HP and EDS would employ about 311,000 people, compared with IBM's 386,500.

An IBM spokesperson said the company would not have a comment.