Deal would lift HP in down times
Seeking a buffer from the ups and downs of the computer business, Hewlett-Packard Co. acknowledged Monday that it was in advanced talks to buy technology outsourcing company Electronic Data Systems Corp.
Founded by H. Ross Perot in 1962, Electronic Data would boost HP’s effort to challenge IBM Corp. in one of its strongholds: providing technology services to major corporations. If consummated, the deal would more than double HP’s technology-services revenue to nearly $40 billion.
HP and Electronic Data confirmed a Wall Street Journal report that they were in serious talks, but they cautioned that negotiations could fall apart. The companies declined to disclose the potential sale price, which the newspaper pegged at $12 billion to $13 billion.
The report sent shares of Electronic Data, based in Plano, Texas, soaring nearly 28%, or $5.27, to $24.13. Palo Alto-based HP’s shares declined nearly 5%, or $2.30, to $46.83.
Shares of Computer Sciences Corp., the high-tech services company formerly based in El Segundo, rose nearly 9%, or $3.90, to $47.44 on speculation that it might become the next takeover target. A spokesman at the company, now based in Falls Church, Va., declined to comment.
Analysts said the bid for Electronic Data showed that HP was trying to protect its balance sheet from the softening economy. The company is the worldwide leader in personal computer and printer sales and a strong competitor in computer servers, but sales of those products ebb and flow.
In contrast, the services business -- which includes consulting as well as setting up and running corporate data centers, software and other technology -- often grows during downturns as companies outsource tasks to reduce costs. Plus, corporations often sign multiyear contracts that pay out in predictable ways.
The services business also holds greater potential for growth than many of HP’s computer and printer businesses, said Tom Smith, a computer hardware analyst at Standard & Poor’s Equity Research.
“There are more ways to add and invent new consulting services if you can establish long-term contracts,” he said. “And if you have good services, it supports the next round of hardware sales, and so on. It creates a steadier business.”
David Garrity, director of research at Dinosaur Securities, said offering strong services had made hardware companies such as HP “a trusted advisor to a business.”
If completed, the acquisition would be HP’s largest since its $19-billion deal for Compaq Computer in 2002.
“There can be no assurances that an agreement will be reached or that a transaction will be consummated,” HP said in a statement. “HP does not intend to comment further until an agreement is reached or discussions are terminated.”
Under Chief Executive Mark Hurd, analysts said, HP is using its increasing financial strength to find new areas to grow. With $104 billion in revenue in 2007, HP passed IBM, which reported $99 billion in revenue, as the largest U.S. technology company.
Its services group has grown slowly but steadily since HP tried unsuccessfully in 2000 to acquire the consulting division of PriceWaterhouseCoopers, which was later snapped up by IBM. In HP’s last fiscal year, the services group contributed sales of $16.6 billion, about 15% of total revenue. Electronic Data saw $22 billion in annual sales last year.
“This has to be the largest deal in the consolidation of the services industry,” said Paul Roehrig, principal analyst at Forrester Research. “Whether it can pay off in the long run -- that’s a big unknown.”