Hewlett-Packard confirms it will acquire EDS for $12.5bn

Hewlett-Packard Inc. announced Monday that it is in talks to acquire Electronic Data Systems Corp., in a deal that would give the hardware giant a significant boost in the computer-services market against International Business Machine Corp.

Sources familiar with the matter said Monday that the biggest personal-computer maker HP will pay as much as $13 billion for EDS, the operator of corporate computer systems.

The combination of EDS, the second-biggest computer-services provider and HP, the No. 5 player in tech services, will create a $40 billion-a-year powerhouse that would vault it to a close second to IBM in technology services.

While both HP and EDS confirmed they're engaged in advanced discussions, neither would comment further on the issue.

If the deal consummates, it would be Palo Alto, California-based Hewlett-Packard’s largest since it acquired Compaq for $20 billion in 2002.

IBM continued to be the top IT services company in 2007, with more than $54 billion in sales and 7.2 percent market share, while EDS weighed in at No. 2 position, with services revenue of $22 billion and 3.0 percent of the market. On the other hand, HP was at No. 5 position, with 2.2 percent market share and $17.25 billion in revenue.

Analysts have different opinion about the merger plan of tech titans. "HP has recognized that the commanding heights in IT have shifted to IT services," said Ben Pring, an services industry analyst with Gartner Inc. "And they know that catching up to IBM organically, and without acquiring someone else, would be impossible."

On the other hand, Cowen & Co. analyst Louis Miscioscia is not in favor of the deal. "We would not view the deal as being the right strategic move for H-P," Miscioscia said. "We don't believe it would be horrible, but it would limit the number of other deals H-P might be able to do both from a financial and management bandwidth perspective."

Founded by former IBM salesman and future presidential candidate Ross Perot with $1,000 in 1962, EDS is the largest independent systems management and services firm in the US which currently employs more than 135,000 people.

Update: Hewlett-Packard confirmed it’s buying EDS for $25 a share, or $12.5 billion.

“The combination of HP and EDS will create a leading force in global IT services,” said CEO Mark Hurd. “Together, we will be a stronger business partner, delivering customers the broadest, most competitive portfolio of products and services in the industry. This reinforces our commitment to help customers manage and transform their technology to achieve better results.”