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HP shares hit by $14bn move to buy EDS

Shares of Hewlett-Packard fell 7 per cent on Tuesday, adding to a slide of 5 per cent on Monday after the world’s biggest information technology group agreed to pay $13.9bn for Electronic Data Systems, the IT services company.

The fall in HP’s stock price wiped out several billion dollars in market capitalisation, suggesting that Wall Street was taking a sceptical view of Mark Hurd’s biggest deal in three years as HP’s chief executive.

If approved by EDS shareholders, the deal would more than double the size of HP’s services business, challenging IBM’s leadership in one of the technology industry’s most lucrative markets.

But it would also add a relatively low-margin, low-growth business to the sprawling IT conglomerate.

The deal would be HP’s biggest acquisition since its controversial $19bn merger with Compaq, a rival PC maker, in 2002.

“This is the biggest deal we have ever seen in IT services,” said Ben Pring, an analyst at Gartner, the market research group.

Mr Hurd defended HP’s rationale for the acquisition in a conference call on Tuesday. “Today’s decision is comp­e­lling commercially, strategically, and financially.”

But the HP chief gave few details about the cost savings HP expects to gain by combining its $16.6bn services business with that of EDS, which was founded in 1962 by US billionaire Ross Perot. EDS makes money by managing other companies’ computer systems and performing other computing tasks, like payroll management and order processing.

HP’s $25 a share offer represented a premium of about 30 per cent to EDS’s stock price on Monday just before news of the deal broke.

Under the deal, HP will fold much of its $16.6bn services business into EDS, which will continue to operate from its Plano, Texas headquarters. Ron Rittenmeyer, EDS chairman and CEO, will run the business, reporting directly to Mr Hurd.

Together, HP and EDS last year accounted for 5 per cent of global services sales. IBM will remain the market leader following the deal, with its $54bn in services re- venues accounting for 7 per cent of the highly fragmented services market last year.

The deal’s success could hinge on whether Mr Hurd is able to avoid the integration problems that dogged his predecessor, Carly Fiorina, after HP’s merger with Compaq six years ago, according to Mr Pring at Gartner.

“It’s going to come down to how well they execute,” he said. “EDS are deep in the heart of Texas, and although they’ve tried to dilute that style over the years, it’s still tie-wearing, command-and-control type model. It’s like chalk and cheese.”

Mr Rittenmeyer said a relatively low degree of overlap between the companies’ services customers should help smooth the process, while access to HP’s cutting-edge technologies should help EDS provide better services. “It is going to make our customers have a much broader reach,” he said.

Cost cutting is likely to be a priority for the combined group. In spite of an ongoing restructuring that has seen EDS renegotiate some less profitable long-term IT contracts, profit margins of the company remain well below those of IBM’s services business.

HP’s shares fell 7.2 per cent on Tuesday to $43.46. EDS’s shares rose 1.5 per cent to $24.43, following a 27 per cent jump on Monday after news of the deal broke.

Источник: Financial Times

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