HP in talks to buy EDS for up to US$13 billion

Deal would strengthen HP's competitive position against IBM, but still would leave it about US$10 billion short of IBM's global services revenue

Hewlett-Packard is in advanced talks to acquire IT services company Electronic Data Systems in a deal that would give it more competitive muscle against worldwide services market leader IBM.

The pricetag for EDS could be around US$13 billion, according to a report in the Wall Street Journal published on Monday.

Both companies issued statements Monday confirming that they are in "advanced discussions" about a merger. They said they would not comment further until a deal is reached or the discussions end, and they each cautioned that there is no guarantee that they will come to an agreement.

The deal would strengthen HP's competitive position against IBM, whose Global Technology Services division has long been a strong profit generator for the company.

"I see it as an attempt by HP to really go head to head with IBM in a much more meaningful way, especially in technology services and IT outsourcing, said Dana Stiffler, research director with AMR Research.

Even after the merger, however, the combined companies' global services revenue would fall about US$10 billion short of that of IBM, based their figures reported for 2007, she said.

The market at stake was worth US$672.3 billion worldwide in 2006, a 6.4 per cent increase from 2005 according to a Gartner study released about a year ago. While IBM led the market with about US$48 billion in revenue compared to second-place EDS with about US$21 billion, EDS' 7.6 per cent growth outpaced IBM's 1.8 per cent growth. HP took in about US$16 billion in services revenue and grew 2.1 per cent between 2005 and 2006.

The deal would strengthen HP's services capability in some areas but not others. EDS would give HP a boost in custom application services and infrastructure management services, but less so in managing packaged applications from the likes or Oracle and SAP, Stiffler said.

"Another thing it wouldn't give HP is a strong business consulting presence, a go-to-market capability where you address operational executives and line of business people as much as the CIO," she said.

EDS may well be open to an acquisition though, according to Stiffler. "I think aligning themselves to HP makes them potentially a more future-focused and viable competitor than they are as a standalone company," she said.

There is a challenge for both companies. "Both HP and EDS grew up in a traditional world prior to India emerging as a global delivery center," Stiffler said, noting that Indian companies such as Wipro are focused on providing low-cost application development services.

It's a fairly bold move by HP, said Kathryn Hale, research vice president at Gartner. ""That is just amazing. It sounds more than just speculation."

Only HP, which earns US$17 billion in revenue in 2007, has the wherewithal to acquire EDS, which is second in outsourcing revenue at US$22 billion, Hale said. That would make it the second-largest services company in the world, bringing it closer to IBM, which earned US$54 billion in services last year.

HP's services focus mainly on product support and the EDS acquisition could give HP the professional services revenue it would need to be considered a serious threat to IBM, Hale said. HP will also be able to use EDS' global network to expand its services presence, Hale said.

EDS has been struggling recently and HP acquisition would make a difference to both companies, Hale said. In its most recent earnings conference call, EDS talked about layoffs.

(James Niccolai in San Francisco contributed to this report.)

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