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Hewlett-Packard to buy EDS for $12.6 billionDeal would make HP No. 2 behind IBM in technology services

By Michael Liedtke

Associated Press

SAN FRANCISCO — Hewlett-Packard Co. is buying Electronic Data Systems Corp. for $12.6 billion in a deal that will create the second-largest technology services provider behind IBM.

Under the terms announced today, Palo Alto-based HP will pay $25 per share in cash for EDS, which pioneered the concept of running computer systems and providing other high-tech help for large companies and government agencies.

It’s a field dominated by IBM, which generated $54 billion in revenue from technology services last year. HP’s technology services revenue will more than double to more than $38 billion with the addition of EDS, which had $22 billion in revenue last year.

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The deal is expected to close during the second half of this year and begin to boost HP’s profit in its fiscal year ending in October 2010.

Once the marriage is completed, HP estimates it will have about a 7 percent share of the technology service market compared with IBM’s 10 percent share. The deal will enable HP to leapfrog Fujitsu and Accenture in the niche.

To make sure the EDS takeover pays off, HP indicated it will make significant layoffs as it eliminates overlapping jobs and other expenses. In conference calls today with media and analysts, HP Chief Executive Mark Hurd and EDS CEO Ronald Rittenmeyer declined to estimate how many workers might lose their jobs.

"There are obviously going to be some changes," said Rittenmeyer, who will run the combined technology services unit and report directly to Hurd.

The combined services business would have 210,000 employees and operations in more than 80 countries. It will retain the EDS brand and EDS’ Plano, Texas headquarters.

Hurd hailed the EDS deal as "compelling."

But analysts sounded less sure on today’s conference call as they repeatedly grilled Hurd why he was willing to pay so much for EDS, given that the company’s stock price had fallen by about 30 percent over the past year before news of the deal leaked out late Monday.

Some analysts expressed concern that EDS will become a drag on HP’s revenue growth while others indicated they believed the company would have been better off spending its money buying an assortment of smaller software makers.

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Hurd repeatedly brushed aside those misgivings in separate calls with analysts and reporters Tuesday, predicting HP and EDS will be able to create the "best services company on planet Earth, delighting customers in everything we do."

HP said the EDS acquisition had an "enterprise value" of $13.9 billion and didn’t immediately explain how what that figure included. But based on 502.6 million EDS shares outstanding as of April 25, the acquisition would be worth $12.6 billion.

Either way, it will mark HP’s largest purchase since it bought Compaq Computer Corp. for $19 billion six years ago. That acquisition paved the way for HP to supplant Dell Inc. as the world’s largest PC maker.

The agreed price of $25 was nearly a 25 percent premium to Friday’s closing price for EDS. The companies said Monday they were in talks. In morning trading Tuesday, EDS shares rose 35 cents to $24.43 while HP lost $2.83, or 6 percent, to $44.

Buying EDS gives more tools to challenge IBM in the lucrative technology services field. HP already has replaced IBM as the world’s largest technology company, based on revenue.

The demand for data management and technology consulting services has steadily grown during the past two decades as the automation of corporate America and the rise of the Internet prompted more businesses to hire contractors to help run their computer software and hardware.

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