Update: HP to buy EDS for $13.9B

IDG News Service - Hewlett-Packard Co. said this morning that it has signed a deal to acquire IT outsourcer Electronic Data Systems Corp. for $13.9 billion, or $25 per share.

The deal has been approved by both companies' boards of directors and is expected to close in the second half of this year. HP said that acquiring EDS will more than double its services revenue to an annual total of $38 billion.

HP plans to fold its outsourcing business into a new unit to be called "EDS -- an HP company," which will be based in Plano, Texas, where EDS has its headquarters.

"This is about us putting our outsourcing business into EDS," said HP Chairman and CEO Mark Hurd, in a conference call with analysts.

The EDS division will be led by EDS Chairman, President and CEO Ronald A. Rittenmeyer, who will report directly to Hurd.

That will take away control of some of HP's services operations from Ann Livermore, executive vice president of HP's Technology Solutions Group (TSG). Services, including outsourcing, contribute almost half of that group's revenue: the other half comes from storage, servers and software. Livermore "has got a big job," said Hurd, adding that much of HP's services activity will remain with TSG.

Rittenmeyer's appointment raised at least one analyst's eyebrows.

"It's interesting that he has been put into this spot, as there were questions about how he was doing since taking over as CEO at EDS," said Gartner Inc. analyst Ben Pring.

The deal will greatly expand HP's IT services business and catapult it to the No. 2 spot, close behind IBM, whose Global Technology Services division has long been a strong profit generator for the company.

"I see [the acquisition] as an attempt by HP to really go head to head with IBM in a much more meaningful way, especially in technology services and IT outsourcing," AMR Research Inc. analyst Dana Stifler said yesterday while the two companies were still in talks.

The worldwide market for IT services was worth $748 billion in 2007, an increase of 10.5% from the year before, according to recent figures from Gartner Inc. IBM led the market with about $54 billion in revenue, followed by EDS with $22 billion. HP was in fifth place with revenue of $17 billion, behind Accenture Ltd. and Fujitsu Ltd.

Buying a services business in a faltering economy is a good investment, because that's when customers are keenest to cut their costs by outsourcing, Hurd said.