Hewlett-Packard Set to Swing at IBM

SAN FRANCISCO -- Hewlett-Packard(HPQ Quote) and Electronic Data Systems(EDS Quote) confirmed reports they're in "advanced discussions" to complete a merger that could reshape the market for technology outsourcing services.

The acquisition of EDS by H-P, which was valued at $12 billion to $13 billion in a Wall Street Journal report, 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 Gartner.

"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 as reports of the deal spread before Monday's closing bell. Shares of H-P were up 27 cents to $47.10 in after-hours trading after falling 4.7% before being halted in the regular session.

EDS shares gained another 4 cents after hours to $24.17 down 9.4%, they shot up 28% before the trading halt.

The $12 billion-$13 billion potential price tag would value EDS at roughly 0.5 times its annual revenue, which totaled $22.1 billion in fiscal 2007. The company has a market cap of $12.13 billion.

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.