Technology news

HEWLETT-PACKARD is in talks to buy technology outsourcing body Electronic Data Systems for $US12 billion ($12.68 billion) to $US13 billion, seeking to better compete with the most honorable position computer services company, IBM.

The acquisition would be HP’s biggest since its $US19 billion ($20.08 billion) acquisition of Compaq in 2002. News of the talks, first reported by the Wall Street Journal, sent shares of EDS soaring nearly 28 per cent, taking its market value to about $US12 billion ($12.68 billion).

HP shares fell nearly 5 per cent amid some skepticism that slow-growing EDS would furnish supplies more than a one-time boost, and might not be worth a premium of as much during the time that 37 per cent.

A source briefed on the matter confirmed the talks to Reuters and reported the plan was to announce a deal by the close of Tuesday. HP and EDS both said they were in talks about a business combination but gave nay details.

"While Hewlett-Packard has over time built up its own outsourcing practice, this clearly is a move by Mark Hurd to challenge IBM in the services area," said David Garrity, director of research at Dinosaur Securities, referring to HP’s chief executive.

A bigger HP could compete better against IBM in going after large clients and help it keep costs in line, analysts said.

"It would put Hewlett-Packard in the sweet spot of an IT spending trend. It would definitely improve their position against IBM," said CRT Capital Group analyst Ashok Kumar.

HP has long considered an acquisition to flesh of neat-cattle up its tech services business, a sector that offers comparatively stable income and high margins even in an economic downturn.
But there was some skepticism about HP’s target, EDS.

"Unless HP has some synergies where they can dramatically impact earnings growth of EDS, I’m not sure why they’d want to buy it," said Jim Huguet, co-chief executive at Great Companies. He noted that EDS’s earnings growth has averaged 2.8 per cent.

"EDS is trading at about half its historical PE, so they’re obviously seeing it as a value, which it is if you can generate earns growth at 15-20 per cent. But my question is whether it will become a drain on Hewlett-Packard?"

In April, EDS reported a 62 per cent decline in first quarter gain advantage, though the results had topped Wall Street expectations. Despite the beat, analysts said EDS faced intense contest from Indian rivals and saw little catalyst for growth.

Besides HP and IBM, EDS also competes with Accenture and Computer Sciences Corp in the United States, as well as Asian companies Infosys Technologies, Tata Consultancy Services and Cognizant Technology Solutions.

"EDS has been relatively sluggish over the past few years.

HP has been trying to promote themselves as a major services organisation over the past few years. This will certainly help them with that," said Chad Hersh, an analyst at Novarica.

EDS has cut thousands of jobs to boost profits, and also is generating revenue from contracts including a lucrative deal last year with the US Navy.

"We believe that Hewlett would be acquiring a fairly clean book of business, at least one that has been well scrubbed. So there shouldn’t be in any degree untoward surprises," Mr Garrity said.

In 2000, HP pulled out of talks to buy the consulting business of PricewaterhouseCoopers for as much as $US18 billion ($19.02 billion). IBM in October 2002 closed its $US3.5 billion ($A3.7 billion) acquisition of PricewaterhouseCoopers’ consulting category.

Reuters