HP Challenges IBM with EDS Buy

Hewlett-Packard has struck a deal to buy Electronic Data Systems for $12.6 billion, seeking to boost its technology services business to better compete against market leader IBM.

The companies said the deal values EDS at $25.00 per share, a 33 percent premium to its closing price on Friday, before reports of merger talks sent the shares soaring on Monday.

"They are getting EDS, which I think is a pretty good company, for a pretty beaten-down stock price," said Matt McCall, president of Penn Financial Group.

"We’re going to start seeing more, I believe, of these strategic deals where it’s not private equity coming, but it’s big companies–such as Microsoft trying to go after Yahoo–who have cash on their books and see beaten-down stock prices," he said. "And just like investors, (they) should be taking advantage of that."

The companies said the deal was worth $13.9 billion including debt.

The acquisition, expected to close in the second half of 2008, will more than double HP’s services revenue, which amounted to $16.6 billion in fiscal 2007. the companies said.

Combined, their services businesses have annual revenue of more than $38 billion and 210,000 employees and do business in more than 80 countries, the companies said.

HP expects the deal to be boost its adjusted fiscal 2009 earnings and its fiscal 2010 net earnings.

HP shares fell 2 percent to $45.89 in pre-market trading after losing nearly 5 percent on Monday. EDS shares rose 1 percent to $24.39 after gaining nearly 28 percent on Monday.