HP to buy EDS for almost $14 billion

Hewlett-Packard Co. will buy EDS Corp. for $13.9 billion, the computer manufacturer announced Tuesday morning. Rumors of the potential acquisition began circulating Monday.

The transaction, which is expected to close in the second half of the year, would more than double HP's services revenue, which amounted to $16.6 billion in fiscal 2007, HP said in an announcement on its Web site. The deal has been approved by the boards of both companies.

HP said it will establish a new business group to be branded EDS - an HP company, which will be based at EDS headquarters in Plano, Texas.

EDS' 2,200 employees in the Washington area will see no change, said Bill Ritz, a company spokesman. "It will be status quo," he said.

Acquiring EDS advances HP's stated objective of strengthening its services business, the statement said. The combination will provide extensive experience in offering solutions to customers in the areas of government, health care, manufacturing, financial services, energy, transportation, communications, and consumer industries and retail.

The combined companies' specific service offerings will include information technology outsourcing, including data center services, workplace services, networking services and managed security; business process outsourcing, including health claims, financial processing, customer relationship management and human resources outsourcing; applications, including development, modernization and management; consulting and integration; and technology services.

After the deal closes, EDS will continue to be led by Ronald Rittenmeyer, EDS' chairman, president and chief executive officer, who will join HP's executive council and report to Mark Hurd, HP's chairman and CEO.

HP said the companies' collective services businesses, as of the end of each company's fiscal 2007, had annual revenues of more than $38 billion. Together they have 210,000 employees and do business in more than 80 countries.

The deal will make HP the second-largest player behind IBM Corp. and is its largest acquisition since it acquired Compaq Corp. for $20 billion six years ago, the statement said.

Once approved by government regulatory agencies, the transaction would make the combined companies much more competitive with IBM, which is regarded as a giant in the government IT outsourcing market, said Bob Kipps, managing director at investment banking firm KippsDeSanto and Co.

The deal would give HP "an enormous outsourcing offering that they don't have right now," he said.

IT outsourcing companies in general have been trading lower than usual on the stock market, Kipps said, adding that their valuation is not what it was six months ago.

The desire to expand its outsourcing capabilities is not new to HP. The Palo Alto, Calif., technology company was rumored to be involved in a potential deal to purchase all or part of Computer Sciences Corp. in 2006 but didn't close the deal, Kipps said. What's more, HP also was close to acquiring PwC Consulting as long ago as 2000, but IBM bought the company instead.

HP had annual revenue of $104.2 billion in 2007, and EDS had annual sales of $22.1 billion last year. EDS ranks No. 10 on Washington Technology's 2008 Top 100 list of the largest federal contractors. HP is ranked No. 39.

Washington Technology Deputy Editor William Welsh contributed to this story.