HP to buy Texas-based firm
Posted on Wednesday, May 14, 2008
SAN JOSE, Calif. — Hewlett-Packard on Tuesday announced a definitive agreement to purchase Texas-based Electronic Data Systems for $ 13. 9 billion, in a deal that could bolster the high-tech giant’s efforts to compete with IBM in the fast-growing market for technology consulting services.
The acquisition will more than double Hewlett-Packard’s business providing services to corporate and government clients, according to Chief Executive Officer Mark Hurd, who said it will make Hewlett-Packard “a leading force in the global IT industry.” IBM currently dominates that business, with an estimated $ 48. 3 billion in revenue from business services. Hurd said the combined revenue of Hewlett-Packard and Electronic Data Systems from business services was “more than $ 38 billion” last year.
The acquisition, which has been approved by the boards of both companies, is Hewlett-Packard’s biggest since it bought Compaq for nearly $ 20 billion in 2002 — and the largest such deal since Hurd took the helm at Hewlett-Packard in 2006.
Hewlett-Packard announced separately Tuesday that its second-quarter earnings exceeded expectations, with earnings of 80 cents per share, up from 65 cents in the same quarter last year. The company said it had revenue of $ 28. 3 billion from all its divisions for the quarter, compared with $ 25. 5 billion for the same period a year ago. Shares fell $ 2. 56 Tuesday to close at $ 44. 27.
Analysts say the Electronic Data Systems acquisition will enable Hewlett-Packard to grow in a market that hasn’t been its principal strength, but in which it has been trying to expand in recent years, as big corporations and government agencies are increasingly turning to outside contractors for technology expertise.
Hurd said Electronic Data Systems will become a Texas-based division of Hewlett-Packard and Electronic Data Systems Chief Executive Officer Ron Rittenmeyer will report to Hurd. At a joint news conference, the two executives said the combined companies will have 210, 000 employees doing business in 80 countries. They said they expected to increase efficiency by combining the firms, acknowledging that some jobs may be trimmed but declined to give specifics.
“This acquisition really provides a type of scale and global credibility that HP needed to compete more effectively with IBM” in the business-services market, said analyst Tom Kucharvy of the Ovum Group, which does technology consulting.
Analysts have been predicting Hewlett-Packard would report a healthy profit for the most recent quarter, despite some general economic uncertainty in the United States and potential softening in the personal-computer market, which Hewlett-Packard dominates.
While sales of hardware — from printers and personal computers to larger servers — contributed the biggest share of Hewlett-Packard’s $ 104 billion in revenue last year, the Palo Alto, Calif.-based company has been expanding its technology consulting and services business in recent years.
Hewlett-Packard had about $ 16. 4 billion in revenue from technology consulting services in 2006, according to estimates by Gartner, a market research firm. That put Hewlett-Packard in fifth place in that market. IBM was the leader with $ 48. 3 billion, and Electronic Data Systems was second with $ 21. 3 billion.
“I think both companies are looking at the opportunity to increase global market share,” said Joseph Vafi, a Wall Street analyst at Jefferies & Co.
In addition to giving Hewlett-Packard a bigger footprint in the consulting market, the deal could also provide Hewlett-Packard more opportunities to sell hardware.
Kucharvy said Electronic Data Systems has deeper knowledge and experience as a consultant for specific segments of government and industry, such as health care, which would strengthen Hewlett-Packard’s hand.
Hewlett-Packard has made several moves to expand its offerings for business clients in recent years, after its bid to acquire the consulting arm of PricewaterhouseCoopers failed in 2000.
In 2006, Hewlett-Packard spent $ 4. 6 billion to acquire Mercury Interactive, which made software that manages other business software. Last year, it paid $ 1. 6 billion for Opsware, which made software that allows large businesses to update other software and servers.
Electronic Data Systems already had a strategic alliance with Opsware, Kucharvy said. Hewlett-Packard also has hired several veteran Electronic Data Systems executives, including John W. Mc-Cain, who runs one of Hewlett-Packard’s consulting units.
Electronic Data Systems has struggled with poor financial performance in recent years and, though profitable, was rumored as a takeover target more than once. Under Rittenmeyer, one analyst said, “they have cleaned things up.” Today, Electronic Data Systems does everything from helping other companies manage their information technology systems to advising them on buying telephone systems. The company recently announced a contract with the U. S. Department of Veterans Affairs to staff call centers that will contact thousands of military veterans and help them obtain medical services.
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