San Francisco: Hewlett-Packard Co. is negotiating to buy technology services provider Electronic Data Systems Corp. in a deal that could help the world’s largest personal computer maker snap up more data management and consulting contracts.
Palo Alto-based HP and Plano, Texas-based EDS confirmed that the deal could be reached sometime today. According to industry estimates, HP will pay $12 - 13 billion, a price that translates to $24 to $26 per share.
The two companies declined to comment beyond their confirmation of the talks. EDS shares soared $5.27,or nearly 28%, to finish Monday at $24.13. HP shares dropped $2.49, more than 5%, to close at $46.64 as investors fretted over the deal’s logistics.
HP ended January with nearly $10 billion in cash. With a market value of about $115 billion, HP could easily use its own stock to finance the purchase.
Could be HP’s biggest acquisition
Like many corporate marriages, bringing together HP and EDS could trigger cultural clashes that ruin the union, said AMR Research analyst Dana Stiffler. “Palo Alto versus Plano wrangling will destroy any short-medium term benefit unless there’s a strong integration roadmap,” she predicted.
If the deal is completed, it would be HP’s biggest acquisition since it bought Compaq Computer Corp. for $19 billion in 2002.
HP has been trying to expand its technology consulting and data management business for years, hoping to challenge rival IBM Corp.’s leadership in the lucrative field. In 2000, HP attempted to buy PricewaterhouseCoopers’ consulting division before those discussions unraveled. IBM wound up buying PricewaterhouseCoopers’ consulting arm instead.
The demand for technology consulting and customer support services have steadily grown during the past two decades as the automation of corporate America and the rise of the Internet prompted more businesses to hire outside help to help ensure all the computer software and hardware runs smoothly.
IBM’s technology services division brought in revenue of $54 billion year, accounting for half of the company’s total sales. Combined, EDS and HP’s technology services division had about $39 billion in revenue last year.
Could mean more work for HP
Acquiring EDS also could yield more government work for HP, which had about $500 million in prime federal contracts in fiscal 2007. EDS is far better connected, with deals worth about $2.5 billion, putting it among the top 10 among government technology contractors.
Combined, HP and EDS still would lag significantly behind government contractors like Lockheed Martin Corp. and Boeing Co. EDS earned $716 million on $22.1 billion in revenue last year.
Former IBM salesman H. Ross Perot left IBM to start EDS in 1962 and practically invented the business of running other companies’ computer systems, now called information-technology or IT services. Perot sold EDS to General Motors Corp. for $2.5 billion in 1984 and eventually became so disillusioned with how that deal worked out that he sold his remaining EDS shares to the car maker so he could start a rival service bearing his name.
The company lost $1.7 billion in 2003, but it gradually righted itself under CEO Michael Jordan, a retired CBS and Westinghouse CEO who was hired to lead a turnaround. Jordan fixed some money-losing contracts, including a multibillion-dollar deal to build a communications network for the Navy and Marine Corps, and began cutting costs by sending thousands of jobs to low-cost countries such as India.