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HP Will Hook Up with EDS in $13B Deal

Industry sources have confirmed to eWEEK that Hewlett-Packard will indeed acquire Electronic Data Systems for about $13 billion in a transaction that undoubtedly will make folks at IBM a bit nervous.

The announcement may come as early as May 14, industry sources said.

HP acknowledged the news first earlier today.

"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 through 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 news broke May 12 from an analyst The Station respects and in flash notices published by the Wall Street Journal and earlier in the day.

The impending deal would make the newly merged company the second-largest IT services company in the world, but not by much. EDS is among the world leaders in outsourced IT services; HP does that, too, but focuses mostly on hardware, software and associated services.

IBM Global Services, as of today, makes about $11 billion per quarter. HP made about $4.2 billion and EDS about $6 billion per quarter in services revenue last year. Talk about a new competitor on the international IT block.

The rumor sent EDS shares up 28 percent to $24.13 in after-hours trading on the New York Stock Exchange, undoubtedly sparked by traders who had confirmation of the deal. HP shares closed at $46.83, down 4.7 percent.

It would be a very tricky merger. If you thought the failed Microsoft-Yahoo deal was a terrible clash of cultures, this impending one could be only slightly less prickly.

Both HP and EDS are old-line IT companies with a long history of success at high levels. Both are known for being more conservative in approach than say, a Web 2.0 company such as eBay or Google. Both have a high number of government and large-enterprise customers.

But HP, thanks largely to the new leadership provided by CEO Mark Hurd, has regrouped itself following the hugely problematic Compaq merger of 2002. EDS has had a bit of a struggle in the last year.

EDS had a market value of about $10.5 billion. The company last month reported a 62 percent drop in profits for the first quarter to $62 million.

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

EDS, based in Plano, Texas, was founded by former presidential candidate and longtime billionaire Ross Perot way back in 1962. Perot sold the company to General Motors in 1984, and founded Perot Systems in 1988.

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 billion in revenue in 2007, making it the first IT firm to report revenues exceeding $100 billion.

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; it reported revenues of $24 billion in 2007. It is ranked as one of the largest service companies on the Fortune 500 list.

A merger of these two giants would be both expensive and time-consuming. There will be a great deal of overlap in some of the service lines, such as 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, 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, Babineau 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 to IBM's 386,500.

An IBM spokesperson said the company would not comment.

Chris Preimesberger

Chris J. Preimesberger

Chris J. Preimesberger is Editor-in-Chief of eWEEK and responsible for all the publication's coverage. In his 13 years and more than 4,000 articles at eWEEK, he has distinguished himself in reporting...