EDS Merger Is Deja Vu for H-P Investors
05/13/08 - 05:12 PM EDT
Alexei Oreskovic
"I guess I can see why they're doing it," says Pat Adams, the Chief Investment Officer of Choice Funds, which doesn't currently own H-P shares. "It kind of broadens out the company. But it doesn't really get them into a big growth curve," he says.
EDS has grown its sales between 2% and 6% during the past four quarters, while revenue in H-P's services group grew between 6.5% and 11% during the same time frame. "It would be kind of neat for them to lay on something that could really boost the top line," says Adams. The numbers also look disappointing from a profitability standpoint, with EDS posting operating profit margins in the recent quarter that are roughly half the level of H-P's services business. H-P said the acquisition will contribute to adjusted earnings in the next fiscal year, and would add to GAAP earnings in fiscal 2010. But the company did not give investors a sense about how EDS will affect the company's gross profit margin and operating profit margin. "H-P didn't give any kind of guidance or financial impact of this deal on the operating model and I think that is disconcerting," says one large institutional investor, whose firm has stake in H-P. H-P will pay for the deal with a combination of the $9.9 billion in cash on its balance sheet and incremental debt, according to a company spokesperson.
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