Hewlett-Packard Buying EDS for $13.9B

The deal represents a challenge to IBM. The company also released preliminary second-quarter guidance.
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Updated from 7:48 a.m. EDT

SAN FRANCISCO --

Hewlett-Packard

(HPQ) - Get Report

and

Electronic Data Systems

(EDS)

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) - Get Report

.

"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.

In December, Hurd told analysts at a briefing that the company's revenue forecast anticipated some small acquisitions this year, but didn't include any major deals.

EDS, which is based in Plano, Texas, provides technology outsourcing services to various organizations and had revenue of $22.1 billion in fiscal 2007.

According to IDC's Welch, EDS has developed successful practices around specific industries, such as transportation and aviation, handling key operations such as ticket reservations and maintenance scheduling.

The so-called business process outsourcing is the fastest-growing segment of the technology services industry, says Welch. And it fits nicely into H-P's services group, which is more heavily weighed towards the slow-growing technology support business.

H-P services had sales of $16.6 billion in fiscal 2007, according to H-P.