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HP + EDS = Big, big, big


By P. J. Connolly
May 13, 2008 — 
Whether the corporate cultures of California and Texas are compatible will be the important question once the dust has settled on the deal struck between Hewlett-Packard and Electronic Data Systems.

Announced today, HP will acquire EDS for US$25 a share, or $13.2 billion for the consulting giant. EDS will remain headquartered in Plano, Texas, and the company’s chairman, president and CEO Ron Rittenmeyer will stay at the head of what will become an HP business group. He will also join HP’s executive council, reporting to chairman and CEO Mark Hurd.

For EDS, founded by Ross Perot in 1962, this isn’t the first time it was acquired. It proved famously indigestible for General Motors, which acquired the firm in 1984, then spun it off again as an independent company in 1996. The company has struggled in recent years, drawing notable black eyes from its lackluster performance in projects for the American and British governments, affecting the U.S. Navy, U.S. Marine Corps, the Royal Air Force and Her Majesty’s Revenue and Customs, the successor to the Inland Revenue.

The move will complete what has been a long, strange trip for HP, ending its quest to expand its services business by purchasing an existing brand name. Under the leadership of Carly Fiorina, HP made a run at the consulting business of PricewaterhouseCoopers in 2000, but stepped aside to deal with its own problems in a process that ended with Fiorina’s abrupt departure and replacement by Hurd and former chairman Patricia Dunn in 2005.

IBM later picked up the PricewaterhouseCoopers consulting unit in 2002 for $3.5 billion. HP’s offer would have paid in the neighborhood of $18 billion.

HP expects to see the deal pay off as early as fiscal year 2009 for non-GAAP earnings, and in fiscal 2010 by GAAP rules, claiming in the announcement that “significant synergies” were expected to result from the purchase.

The $25 per share offer is a significant boost over EDS’ share price, which closed at $18.86 on Friday.

The move, already unanimously approved by both companies’ boards and to take effect in the second half of this calendar year, boosts HP into second place in the IT services market.

IBM retains its commanding lead in that arena, having rung up around $54 billion in fiscal 2007 from its services business; EDS held the number-two position at roughly $22 billion. HP’s services revenue of $16.6 billion for fiscal 2007 is therefore expected to more than double after the purchase, with the combined figures for fiscal 2007 totaling $38 billion, with 210,000 employees worldwide.


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