Update: HP to buy EDS for £7.13 billion

Hewlett-Packard has signed a deal to acquire IT outsourcer EDS for US$13.9 billion (£7.13bn), or $25.00 (£12.8) per share.

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Hewlett-Packard has signed a deal to acquire IT outsourcer EDS for US$13.9 billion (£7.13bn), or $25.00 (£12.8) per share.

The deal has been approved by both companies' boards of directors, and is expected to close in the second half of this year.

HP said it will more than double its services revenue.

It plans to fold its outsourcing business into a new unit to be called "EDS - an HP company," which will be based in Plano, Texas, where EDS has its headquarters.

"This is about us putting our outsourcing business into EDS," said HP chairman and CEO Mark Hurd, in a conference call with analysts.

The EDS division will be led by EDS chairman, president and CEO Ronald A. Rittenmeyer, who will report directly to Hurd.

That will take control of some of HP's services activities away from Ann Livermore, executive vice president of HP's Technology Solutions Group (TSG). Services, including outsourcing, contribute almost half of that group's revenue: the other half comes from storage, servers and software. Livermore "has got a big job," said Hurd, adding that much of HP's services activity will remain with TSG.

Rittenmeyer's appointment raised at least one analyst's eyebrows.

"It's interesting that he has been put into this spot, as there were questions about how he was going since taking over as CEO at EDS," said Gartner analyst Ben Pring.

The deal will greatly expand HP's IT services business and catapult it to the number two spot close behind IBM, whose Global Technology Services division has long been a strong profit generator for the company.

"I see [the acquisition] 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," Dana Stiffler, research director with AMR Research, said Monday, while the two companies were still in talks.

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

The worldwide market for IT services was worth £384 billion in 2007, an increase of 10.5 percent from the year before, according to recent figures from Gartner. IBM led the market with about $54 billion (£24.4bn) in revenue, followed by EDS with $22 billion (£11.2bn). HP was in fifth place with revenue of $17 billion (£8.7bn), behind Accenture and Fujitsu.

Buying a services business in a faltering economy is a good investment, because that's when customers are keenest to cut their costs by outsourcing, said Hurd.

"Services is countercyclical, the tougher things get, the better services does," he said.

Rittenmeyer said that EDS has a "strong pipeline" of contracts ahead of it.

There is little overlap in the channels by which the two companies reach customers, said Hurd, since HP's services business primarily targets small and medium-size businesses. Nevertheless, Hurd sees other areas where the companies can realize "significant synergies" and reduce operational costs.

The pending deal should not adversely impact HP partners who are authorized to sell services for its products, Hurd insisted.

"It’s good for HP, so it’s going to be good for our channel partners," Hurd said. "If you look at our outsourcing business today, we try to make it very complementary to our partners."

EDS will remain hardware-agnostic following the acquisition despite the presence of HP’s hardware business, Hurd said.

"While this is a popular question because of our product portfolio, in the services industry you have to work with all kinds of [products]," he said.