Hewlett-Packard Set to Swing at IBM - TheStreet

Hewlett-Packard Set to Swing at IBM

The PC maker is in talks to buy EDS in a deal worth up to $13 billion, potentially reshaping the technology outsourcing market.
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SAN FRANCISCO --

Hewlett-Packard

(HPQ) - Get Report

and

Electronic Data Systems

(EDS)

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) - 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 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.

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.

In a short statement late Monday, H-P acknowledged that it was in talks with EDS.

"There can be no assurances that an agreement will be reached or that a transaction will be consummated. HP does not intend to comment further until an agreement is reached or discussions are terminated," the company said in a press release late Monday. EDS subsequently confirmed the talks in a separate release.

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.