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HP pays $13.9bn for EDS

Silicon Valley opens a branch in Texas

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Updated Hewlett Packard has bought EDS for $13.9bn, doubling its services business at a stroke.

The Silicon Valley giant will pay $25 a share for Texas-based EDS, over 25 per cent more than the services firm's shares were trading at when news of the deal first leaked yesterday.

It will finance the deal through a combination of cash on hand and new debt. HP's had $9.9bn cash in the bank at the end of last quarter. The price is still barely half the size of HP's Compaq buy back in 2001.

EDS will become a business group within HP – branded EDS - an HP Company. The unit will be headed by EDS boss Ron Rittenmeyer, who also joins HP’s executive council. He will report direct to HP boss Mark Hurd.

Once the deal is concluded, HP will have a services business with revenues of $38bn a year and 210,000 employees. It will be in a strong second place in the IT services market behind IT leader IBM.

While EDS has dragged itself away from the abyss it was staring into a few years back, its financial performance has not exactly been stellar. Asked whether he thought HP could drag up EDS’ performance further, Hurd said “We wouldn’t do the deal if we didn’t think we had opportunity to improve the operating level that EDS currently has."

HP is banking on squeezing more value out of the combined firm using the trusty two-pronged weapon of synergy and leverage. Just that alone would deliver shareholder value, according to Hurd. If the companies can use the deal to grow their revenues beyond their existing rates, that would complete the “triumph” he said.

On job cuts, EDS' Rittenmeyer said the firms had very little overlap. He added EDS was already cutting its workforce and this would continue, but added that as part of a bigger company there would be more opportunities for employees. The ones that aren’t laid off obviously.

Hurd delivered on expectations that he would be relying on using machines to replace people to boost margins, saying that every time the firm automated server management, a datacentre, etc, that there was a “cost effect” as well as a “customer delight effect.”

Asked where the deal left TSG boss Ann Livermore, Hurd said “it’s early, but she should be in her office real quick.” Later he elaborated, saying that Livermore would remain in charge of TSG, and the deal essentially consisted of HP “putting our outsourcing business into EDS.”

“You should think of this as the bulk of of HP being operationally unaffected,” he claimed.

Hurd insisted that HP ramping up of its services business wouldn’t alienate its channel partners. “There really isn’t much of a conflict situation,” he said, as the traditional channel targeted the SMB space, while HP’s services business would target corporates.

Hurd said the deal would be accretive on a GAAP basis by 2010, and on a non-GAAP basis by 2009. The deal should close in the second half of this year.

Observers accepted that the companies were complementary on the whole, and that the deal would deliver synergies. IDC, in a research note, described the deal as a "definite wake up call for the likes of Logica, Capgemini, Atos Origin et al."

At the same, said IDC, some of EDS's customers may be nervous that the very qualities that attracted them to the services firm would be eroded under new ownership.

Other observers were less generous. A source at one services rival suggested that EDS's services business was not particularly high margin by industry standards. More importantly, the source said, HP had a historic problem concentrating on more than one thing: "If they're concentrating on integrating the services businesses you can guarantee something will go wrong with the PC or printing business."

Meanwhile, in a preliminary results announcement, HP revealed that revenues for the second quarter came in at $28.3bn, up from $25.5bn a year ago. Earnings per share were $0.80, or $0.87 non-GAAP. Analysts had been expecting $0.84.

It raised its third quarter forecast, predicting revenues of $27.3bn to $27.4bn, with EPS of $0.76 to $0.77 or $0.82 to $0.83 non-GAAP. The full year forecast was also jacked up, and revenues should now be $114.4bn, with EPS of $0.3.30 to $3.34, or $3.54 to $3.58 non-GAAP.

More soon.®

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