Hewlett-Packard will acquire computer consulting firm Electronic Data Systems for $13.9 billion, the companies announced Tuesday. The purchase moves HP closer to head-to-head competition with IBM in the IT-services business.
The acquisition -- the largest since HP acquired Compaq under the leadership of Carly Fiorina -- marks a huge expansion in HP's services business. Combined, HP and EDS did $38 billion in services business in 2007, double HP's current business. HP will pay $25 for each share of EDS common stock.
The new services group will maintain the EDS branding. It will be called "EDS -- An HP Company" and be based in EDS's current headquarters in Plano, Texas. EDS CEO Ronald A. Rittenmeyer will continue to lead the company.
Taking on IBM
"This makes HP a lot more competitive by having a whole lot more services personnel," said Roger Kay, principal analyst with Endpoint Technologies, in a telephone interview. "IBM is the gold standard. This gives them a better shot at it."
HP's roots in services go back to Fiorina's hotly contested acquisition in 2002 of Compaq, which itself bought Digital Equipment in 1998. "They have a pretty good services group, but they wanted to compete with IBM," Kay said. "This puts them closer to that goal."
The only question is how well the companies will integrate, but Kay doesn't expect many problems on that front. HP CEO Mark Hurd is "known as good at integrating," Kay said.
The acquisition "will create a leading force in global IT services," Hurd said. "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."
Rittenmeyer said the deal represent a "great transaction" for EDS stockholders in the form of a "significant premium to our stock price." For customers, "the collective skills of our employees will drive innovation and enhance value for them in a wide range of industries."
The new EDS will provide a dizzying array of consulting services to the enterprise, including IT outsourcing of data-center, workplace, networking, and managed-security services. The companies will offer application development, modernization and management, integration, and other technology services.
In addition, the companies will handle business process outsourcing, including health claims, financial processing, customer-relationship management, and human-resources outsourcing.
Together HP and EDS are targeting a wide range of industries -- everything from government to health care to energy. Other sectors include manufacturing, financial services, transportation, communications, consumer industries, and retail.
EDS was founded in 1962 by Ross Perot, who started the company by buying unused time on a life-insurance company's IBM 7070 mainframe. The following year, EDS invented the facilities management agreement by signing a five-year, set-price contract with Frito Lay. Perot left the company in 1986 when it was acquired by General Motors. In 1996, EDS was spun out from GM to become an independent, publicly traded company.
The original incarnation of EDS under Perot was a "hard-charging, take-that-hill kind of outfit," recalled Kay, who once interviewed for a job with the company. "I was impressed with their efficiency if not their humanity."