HP bidding for EDS; Deal would ramp up services

Updated: Hewlett-Packard is in talks to acquire Electronic Data Systems in a move that would reshape the technology services and outsourcing market.

In a statement Monday, HP and EDS confirmed the talks, first reported by the Wall Street Journal:

HP said:

HP today confirmed that it is engaged in advanced discussions with Electronic Data Systems Corporation regarding a possible business combination involving the two companies.

There can be no assurances that an agreement will be reached or that a transaction will be consummated. HP does not intend to comment further until an agreement is reached or discussions are terminated.

The deal, which reportedly be valued at about $12 billion to $13 billion, would instantly transform HP into an IT services powerhouse able to rival IBM. Buying EDS would also be HP's largest purchase under CEO Mark Hurd's tenure. A purchase of EDS would be the largest acquisition since HP bought Compaq for $20 billion in 2002.

If HP were to acquire EDS it would add $22 billion to revenue a year. For 2007, EDS reported earnings of $716 million. More importantly, EDS would bring to HP a series of long-term IT services contracts that Hurd could use to see hardware and software. For 2007, EDS (all resources) reported total contract value of new contract signings (TCV) of $19.5 billion, down from $26.5 billion in 2006. The 2006 figure included contract renewals with General Motors and the U.S. Navy totaling $7.5 billion.

In other words, HP's business model would look a lot like IBM's.

Also see: HP launches data center as a service; The cloud meets outsourcing

For the fiscal year ended Oct. 31, HP had revenue of $104.3 billion, up from $91.6 billion in 2006. Net income for 2007 was $7.3 billion, up from $6.2 billion. For 2007, HP had services revenue of $16.6 billion with earnings from operations of $1.83 billion.

Here's Citigroup analyst Richard Gardner's take:

The deal makes strategic sense. Outsourcing's  long-term  relationships with large customers create potential revenue synergies. Operating more mission-critical datacenters should also give  HP an edge in new-product development. HP likely plans to apply its infrastructure consolidation/modernization, automation,  and   virtualization   skills  to EDS' infrastructure to boost its margins.

If this deal happens, more consolidation in the services industry is likely. Unisys would likely be a target just for its government contracts. Accenture could either go shopping or also become a target. BearingPoint could be a decent takeover. Meanwhile, Indian outsourcing firms such as Wipro and Infosys could also be in play as beefed up services giants eye low-cost delivery models.