HP and EDS today announced that they have signed a definitive agreement under which HP will purchase EDS at a price of $25.00 per share, or an enterprise value of approximately $13.9 billion. The transaction is expected to close in the second half of calendar year 2008 and to more than double HP’s services revenue, which amounted to $16.6 billion in fiscal 2007. The companies’ collective services businesses, as of the end of each company’s 2007 fiscal year, had annual revenues of more than $38 billion and 210,000 employees. HP intends to establish a new business group, to be branded EDS – an HP company, which will be headquartered at EDS’s existing executive offices in Plano, Texas. HP plans that EDS will continue to be led after the deal closes by EDS Chairman, President and Chief Executive Officer Ronald A. Rittenmeyer, who will join HP’s executive council and report to Mark Hurd, HP’s chairman and chief executive officer.
Buying EDS would vault HP to second place in the global technology services industry, behind International Business Machines Corp. EDS brings HP a strong base in infrastructure outsourcing and the combined company would be better-equipped to go after large clients. In 2000 HP already tried to buy PriceWaterhouseCoopers consulting unit without success. IBM acquired this business in 2002 for a much lower price than what HP was ready to pay.
EDS has a lower margin than HP, but could offer more “stable” outsourcing revenues that are provided by long term contracts. It could help some cross selling other HP products. With this move, HP is trying to emulate IBM’s strategy, as IBM draws about 60% of its revenues from services. By acquiring EDS, HP also gets its hands on EDS’ 60 percent stake in mPhasiS, an Indian services and outsourcing company, with 27,000 workers. IBM has around 50,000 employees in the region; Accenture about 22,000. The EDS stake in mPhasiS could allow HP to reinforce its presence in the fast growing Asiatic market.
However, HP could also face some serious problems. The lack of integration means that the deal will bring no cost synergies, usually an important motivation for this type of acquisition. We could also see some possible political wars between HP and EDS employees that will fight for independence.
The financial community is worried about the price paid. HP shares fell nearly 7 percent after the deal was announced on Tuesday, on top of a 5 percent drop on Monday in anticipation of the news. The declines have wiped about $13 billion off HP’s market value, taking it to $108 billion. The important question is to know if HP, like for the missed PWC deal of 2000, has the bad habit to buy at the peak of the market? Did somebody else want to acquire EDS at this price with the uncertain economic forecasts?