AFI BLOG: Media and Technology

The Wall Street Journal

With EDS Buy, Computer Giant Bulks Up Services

Soon after Mark Hurd became Hewlett-Packard Co.’s chief executive in 2005, he concluded the computer-maker must beef up its technology services if it wanted to catch up to rival International Business Machines Corp.

Mr. Hurd this week took a big step toward that goal, announcing a deal Tuesday to acquire Electronic Data Systems Corp. for $13.25 billion in cash, or $25 a share. Directors of both companies have unanimously approved the deal, which still must be approved by EDS shareholders. An acquisition of the second-largest outsourcing company would more than double the size of H-P’s $16.6 billion in annual revenue services unit.

It also would mark H-P’s largest purchase since 2002, when it risked a shareholder revolt to acquire personal computer maker Compaq Computer Corp., a deal that was widely criticized at the time, but which has since helped H-P supplant Dell Inc. as the world’s top PC maker.

While the EDS purchase may not be as risky, it’s far from certain a H-P/EDS combination will compete with IBM for high-end, high-profit outsourcing deals anytime soon. Some Wall Street analysts pointed out that EDS has lower profit margins than H-P. Shares of H-P fell 4.7% Monday following disclosure of talks between the companies and fell 5.5% more Tuesday after the deal was confirmed, trading down $2.56 at $44.27 at 4 p.m. on the New York Stock Exchange.

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