HP buys EDS for $13.9 billion

HP said Tuesday morning that
it has signed a deal to acquire IT outsourcer EDS
for US$13.9 billion, or $25.00 per share.

The deal has been approved by both companies' boards of directors, and is expected
to close in the second half of this year.

HP said it will more than double its services revenue.

It plans to fold its outsourcing business into a new unit to be called "EDS
-- an HP company," which will be based in Plano, Texas, where EDS has its
headquarters.

"This is about us putting our outsourcing business into EDS," said
HP Chairman and CEO Mark Hurd, in a conference call with analysts.

The EDS division will be led by EDS Chairman, President and Chief Executive
Officer Ronald A. Rittenmeyer, who will report directly to Hurd.

That will take control of some of HP's services activities away from Ann Livermore,
executive vice president of HP's Technology Solutions Group (TSG). Services,
including outsourcing, contribute almost half of that group's revenue: the other
half comes from storage, servers and software. Livermore "has got a big
job," said Hurd, adding that much of HP's services activity will remain
with TSG.

Rittenmeyer's appointment raised at least one analyst's eyebrows.

"It's interesting that he has been put into this spot, as there were questions
about how he was going since taking over as CEO at EDS," said Gartner analyst
Ben Pring.

The deal will greatly expand HP's IT services business and catapult it to the
number two spot close behind IBM, whose Global Technology Services division
has long been a strong profit generator for the company.

"I see [the acquisition] as an attempt by HP to really go head to head
with IBM in a much more meaningful way, especially in technology services and
IT outsourcing," Dana Stiffler, research director with AMR Research, said
Monday, while the two companies were still in talks.

The worldwide market for IT services was worth $748 billion in 2007, an increase
of 10.5 percent from the year before, according to recent figures from Gartner.
IBM led the market with about $54 billion in revenue, followed by EDS with $22
billion. HP was in fifth place with revenue of $17 billion, behind Accenture
and Fujitsu.

Buying a services business in a faltering economy is a good investment, because
that's when customers are keenest to cut their costs by outsourcing, said Hurd.

"Services is countercyclical, the tougher things get, the better services
does," he said.

Rittenmeyer said that EDS has a "strong pipeline" of contracts ahead
of it.

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