HP Stacks Up to IBM

Hewlett-Packard Co is close to a deal to acquire Electronic Data Systems Corp for between $12 billion and $13 billion, according to a source familiar with the matter.

Shares of EDS jumped 27 percent on the news, first reported by the Wall Street Journal, while HP shares slid 2.5 percent. Both stocks were halted, news pending.

COMMENTS:

ASHOK KUMAR, ANALYST, CRT CAPITAL GROUP:

"HP has always sought to gain critical mass on the hosting side. It would give Hewlett critical mass in the hosting solutions market instantaneously" (software as a service).

"It would put Hewlett-Packard in the sweet spot of an IT spending trend. It would definitely improve their position against IBM."

JIM HUGUET, CO-CHIEF EXECUTIVE AT GREAT COMPANIES LLC IN TAMPA:

"Unless HP has some synergies where they can dramatically impact earnings growth of EDS, I’m not sure why they’d want to buy it. Earnings growth has averaged 2.8 percent, so it’s not a major earnings growth company. Unless you can get that up in the 15 to 20 percent range, I’d question whether it’s a good decision.

"EDS is trading at about half its historical PE, so they’re obviously seeing it as a value, which it is if you can generate earns growth at 15-20 percent. But my question is whether it will become a drain on Hewlett-Packard."

CHAD HERSH, ANALYST, NOVARICA, A TECHNOLOGY RESEARCH FIRM

"It will make them one of the largest, if not the largest services player. It has positives and negatives for customers. Scale helps keep costs in line and they could be good for customers. With such a large services organization, the smaller customers might fall through the cracks and get lost."

"But I think they are doing this to go after the truly large players. This will certainly help HP make the case that they are truly a leader in global services."

"EDS has been relatively stagnant over the past few years. HP has been trying to promote themselves as a major services organization over the past few years. This will certainly help them with that."

"This is one of the most interesting acquisitions of the year. Certainly the most interesting acquisition in the technology space."

DAVID GARRITY, DIRECTOR OF RESEARCH, DINOSAUR SECURITIES

"Up until now in terms of traditional information technology outsourcing, and to some extent with respect to business process outsourcing, IBM’s global services division has been far and away the market leader on a stand-alone basis. After that, you had Accenture as the number two. While Hewlett-Packard has over time built up its own outsourcing practice, this clearly is a move by Mark Hurd to challenge IBM in the services area."

"There have been some issues with EDS in the past as to how profitably they had bid some of the contracts. But management at EDS since 2000 really tried to come to grips with improving the overall profitability of its book of business. I would argue that a fair number of problem contracts have already been addressed. For EDS, it’s always been a big issue how much money they made, or they would be able to make, from its relationship with General Motors. I don’t see the issues around the GM contract as being a cloud hanging over EDS.

"We believe that Hewlett would be acquiring a fairly clean book of business, at least one that has been well scrubbed. So there shouldn’t be any untoward surprises."

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