Hewlett-Packard Buying EDS for $13.9B

Updated from 7:48 a.m. EDT

SAN FRANCISCO -- Hewlett-Packard(HPQ Quote) and Electronic Data Systems(EDS Quote) announced a $13.9 billion merger deal Tuesday that could reshape the market for technology outsourcing services.

The acquisition of EDS by H-P, which was valued at $25 per share would make H-P the No.2 player in the market, after IBM(IBM Quote).

"It creates the only other services business in the marketplace that's got nearly the scale that IBM does," says Bob Welch, VP of global services research at industry research firm IDC.

"They'll gain scale in some areas like systems integration and some others where it would have taken them a long time to build that organically," says Welch.

Shares of H-P and EDS were both temporarily halted before Monday's closing bell as reports of the deal spread. Shares of H-P opened at $44.39 Tuesday. Shares fell 4.7% Monday afternoon, before being halted.

Minutes after the merger announcement, H-P released preliminary second-quarter earnings with revenue of $28.3 billion vs. $25.5 billion one year ago. The company reported preliminary GAAP diluted earnings per share (EPS) of 80 cents and non-GAAP diluted EPS of 87 cents, compared with second quarter fiscal 2007 GAAP diluted EPS of 65 cents and non-GAAP diluted EPS of 70 cents.

EDS shares opened trading at $24.43, and IBM opened at $125.12.

The deal would represent the latest in a string of acquisitions by Palo Alto, Calif.-based H-P since Mark Hurd became chief executive in 2005.

H-P acquired Mercury Interactive for $4.9 billion in 2006. Last year, the company bought Opsware for $1.7 billion, and spent an additional $1 billion on 8 other acquisitions.