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HP close to EDS buyout

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Erica Ogg CNET News

Published: 13 May 2008 12:35 BST

HP is in talks to buy Electronic Data Systems, HP confirmed on Monday.

The Wall Street Journal initially reported that the two have been in talks for HP to buy EDS for $12bn to $13bn (£6.2bn to £6.8bn), citing unnamed sources. An agreement between the world's largest computer maker and the IT services provider could come as early as Tuesday, according to the newspaper.

Shares of HP were down six percent after the story posted, and HP confirmed that trading of its stock has been halted. EDS shares were up 27 percent on the news.

HP, which is due to report its second-quarter earnings on Thursday, issued a press release after the close of the stock market on Monday.

"There can be no assurances that an agreement will be reached or that a transaction will be consummated. HP does not intend to comment further until an agreement is reached or discussions are terminated," the statement read.

EDS also issued a statement on Monday afternoon confirming that the two are in "advanced talks", but refused to elaborate.

EDS's revenue in 2007 was $22.1bn, up four percent from the year before. HP's 2007 revenue was $104bn.

If the acquisition goes through, HP would have a stronger competitive hand against IBM as they compete for business customers. Thanks to its Global Services arm, IBM can offer back-end hardware, such as servers, along with long-term service contracts. However, there is one difference: HP still has its PC business and has spent the last year as the top seller of PCs in the world; IBM, on the other hand, sold its PC arm to Lenovo four years ago.

"I think HP has been wanting in some sense to be more like IBM for quite a while," said Gordon Haff, an analyst with Illuminata. "It's perfectly consistent with what HP has been trying to do to become more of a solutions provider rather than [just] a product or technology provider. Whether this is going to make sense is going to turn very much on what kind of price HP can get."

This is not the first time HP has taken a crack at acquiring a major consulting firm. In 2000, HP was in talks to acquire PricewaterhouseCoopers (PWC). The acquisition was the first big move by former chief executive Carly Fiorina. But a significant earnings shortfall in the autumn of 2000, along with significant hand-wringing on Wall Street, prompted HP to drop the idea. IBM acquired PWC for $3.5bn two years later, while HP took a dramatically different strategy and acquired PC maker Compaq. Eight years later, the EDS acquisition would seem to bring the two companies back to the same point, albeit as much larger companies.

In recent years, HP has also been spending significant sums on the acquisitions of corporate infrastructure software companies, including Mercury Interactive, Opsware, SPI Dynamics, Bristol Technology and Peregrine. Combining those corporate-software offerings with a large consulting arm would be a head-on attack on IBM Global Services' ability to sell consulting services around packages such as the Tivoli management software.

The initial take from industry observers is that this deal is Carly 2.0.

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"It's somewhat amusing, because we've seen this play before. I think this is sort of further evidence that HP really does see value at scale — basically, at size," said Haff. "One of the things we've seen very clearly over the last couple years that is Carly really had the right idea; she just couldn't execute on it. She wasn't wrong for saying HP needed to be bigger, effectively," said Haff. "If [the merger] does go through, we're going to end up with an HP that looks a lot like Carly wanted it to look."

The difference, he added, is that it looked like Fiorina couldn't operate a company that large, whereas current chief executive Mark Hurd appears able.

The task of integrating two large companies and their vastly different technology and corporate cultures is an unenviable one. The upside is that HP would have more to offer to companies with large IT infrastructure needs and EDS would be able to broaden its reach. But some have questioned whether bigger is necessarily better.

"Not all customers need a battleship to deliver their IT services," Forrester analyst Paul Roehrig pointed out. "Some customers are looking for smaller, more flexible, transparent service providers. In a sense, I'm wondering if HP is trading off success in the smaller deal for larger deals."

He added that, in the past, "Hurd has said they've not been going after [large deals]. The question is: is this a strategic inconsistency or all part of a master plan?"

CNET News.com's Jim Kerstetter contributed to this story.

Credit: HP in talks to buy EDS from CNET News