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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The acquisition will enable EDS to begin offering lower-priced services to customers, Hurd said.

"There’s a tremendous leverage you get from scale," he said. "We’re spreading our cost structure across a much larger revenue base. We expect to bring that capability to EDS. With many of the functions they do today, we can help them take advantage of that scale."

Buying EDS will grow HP's services business and allow it to offer a wider range of services to attract large business customers. EDS is strong in infrastructure management services and also custom application services, where it helps companies to design, integrate and manage applications.

EDS is less strong in providing services for packaged applications, however, and the acquisition will not give HP a big lift in the type of business consulting services delivered to line managers and business executives either, Stiffler said Monday.

HP has been keen to expand its services business for years, and EDS is not its first attempt to do so. In 2000 HP dropped plans to acquire PricewaterhouseCoopers Consulting, which was ultimately scooped up by IBM two years later, for $3.5 billion.

HP's services business generated only 16 percent of its total 2007 revenue of $104.3 billion, while IBM makes more than half of its annual revenue from services. The company increased its revenue estimate for fiscal year 2008 on Tuesday morning, saying it now expects revenue of between $114.2 billion and $114.4 billion, up from a previous estimate of $113.5 billion to $114 billion.

The company also reported preliminary results for its second fiscal quarter, ended April 30. It made revenue of $28.3 billion for the quarter, compared with $25.5 billion a year earlier. The figure beat estimates of analysts polled by Thomson Financial, who had expected $27.98 billion. HP also said estimated earnings per share for the quarter were $0.80, up from $0.65 one year earlier. Excluding acquisition related costs, EPS was $0.87, beating the analyst estimate of $0.84.

It expects to announce final results on May 20.

EDS will give HP the muscle it needs to become a serious threat to IBM's services business, said Kathryn Hale, research vice president at Gartner, also speaking before the companies confirmed the deal. HP will also be able to use EDS' global network to expand its services presence, Hale said.

For EDS, Stiffler said, "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.

EDS and its subsidiaries employ about 137,000 people worldwide, around 90,000 of them overseas. About 45,000 of the overseas employees work in what EDS calls "best shore" countries, affording high service quality and low cost. EDS aims to boost the number of overseas workers in the "best shore" countries to around 55,000, said Rittenmeyer. HP ended its 2007 fiscal year with about 172,000 workers.

The $25.00 per share offer is a $6.14 premium above EDS' closing share price of $18.86 Friday. Rumours of the acquisition drove up EDS' share price to $24.13 by the close of trading Monday. Within two hours of trading Tuesday, EDS shares were at $24.45, up by $0.37, and HP shares were down by $2.95 to $43.88. The share price of buying companies often drops on the day an acquisition is announced, as traders calculate that big acquisitions usually have a dilutive effect on earnings, at least initially.

(Chris Kanaracus in Boston, James Niccolai in San Francisco and Elizabeth Heichler contributed to this report.)

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