Hewlett-Packard made a bold stroke Tuesday to acquire Electronic Data Systems for $13.9 billion in a bid to move further into high-margin technology services businesses and take on IBM.
The deal for $25 per share is expected to close in the second half of 2008. In afternoon trading, shares of HP fell $3.21, or 6.9 percent, to $43.62, while EDS gained $.35, or 1.45 percent, to $24.43.
HP last year sold 49.5 million computers to topple Dell as the No. 1 supplier worldwide, according to iSuppli. But hardware, including printers where HP also is No. 1, tends to carry lower margins then services.
In a research note, Wachovia Securities praised the EDS acquistion as a “decisive step towards building critical mass in services.”
HP’s stock has revived since the arrival of Chief Executive Mark Hurd, who instituted a cost-cutting regimen. The integration of EDS is expected to prompt additional layoffs.
In a conference call Tuesday, Mr. Hurd spoke of a “leaner cost structure” and EDS Chief Executive Ronald Rittenmeyer said that the combined company will “clearly look at synergies.”
Mr. Rittenmeyer will head HP’s new services group, branded EDS, from his company’s existing offices in Plano, Texas. HP expects the transaction will add to fiscal 2010 earnings based on standard accounting measures.
The deal is HP’s biggest since its acquisition of computer maker Compaq in 2002 for $19 billion and marks a pivotal step by Mr. Hurd. The Compaq deal was engineered by former Chief Executive Carly Fiorina, who ultimately lost her job as growth at Palo Alto, California-based HP stalled amid integration difficulties.
HP said it plans to finance the EDS acquisition with existing cash and by issuing new debt.
Wachovia analysts noted that HP’s overall operating margins are 9-10 percent, but its services business has had margins of 10-12 percent in the four quarters up to January 2008.
On Tuesday, HP also announced preliminary second quarter earnings, excluding special charges, of $.87 per share on revenue of $28.3 billion. That compared to consensus Wall Street estimates of $.84 and $27.98 billion. The company is scheduled to release its final quarterly results on May 20.
Under Hurd, HP has acquired companies like Mercury Interactive, a maker of application management software, for $4.5 billion in 2006 and Opsware, a data center automation software maker, for $1.6 billion in 2007.