HP close to buying EDS for $12bn

Hewlett-Packard is in talks to buy Electronic Data Systems, HP has confirmed.

The Wall Street Journal initially reported the two have been in talks for HP to buy EDS for $12bn to $13bn, citing unnamed sources. An agreement between the world's largest computer maker and the IT services provider could come as early as Tuesday, according to the Journal.

Shares of HP were down six per cent after the story posted, and HP confirmed that trading of its stock has been halted. EDS shares were up 27 per cent on the news.

HP, which is due to report its second quarter earnings on Thursday, issued a press release after the close of the stock market Monday.

"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 statement read.

EDS also issued a statement Monday afternoon confirming that the two are in "advanced talks," and but refused to elaborate.

EDS' revenue in 2007 was $22.1bn, up four per cent from the year before. HP's 2007 revenue was $104bn.

If the acquisition should go through, HP would have a stronger competitive hand against IBM as they compete for business customers. Thanks to IBM's Global Services arm, Big Blue can offer back-end hardware such as servers along with long term service contracts. But there's one difference: HP still has its PC business, and has spent the last year as the top seller of PCs in the world. IBM, on the other hand, sold its PC arm to Lenovo four years ago.

"I think HP has been wanting in some sense to be more like IBM for quite a while," said Gordon Haff, analyst with Illuminata. "It's perfectly consistent with what HP has been trying to do to become more of a solutions provider rather than (just) a product or technology provider. Whether this is going to make sense is going to turn very much on what kind of price HP can get."

This also isn't the first time HP has taken a crack at acquiring a major consulting firm. In 2000, HP was in talks to acquire PriceWaterhouseCoopers. The potential acquisition was the first big move by then-CEO Carly Fiorina. But a significant earnings shortfall in the fall of 2000, along with significant handwringing on Wall Street, prompted HP to drop the idea. IBM acquired PWC for $3.5bn two years later, while HP took a dramatically different strategy and acquired PC maker Compaq. Eight years later, the EDS acquisition would seem to bring the two companies back to the same point, albeit as much larger companies.

In recent years, HP has also been spending big on corporate infrastructure software companies, including the acquisitions of Mercury Interactive, Opsware, SPI Dynamics, Bristol Technology, and Peregrine. Combining those pieces of corporate software with a large consulting arm would be a head-on attack on IBM Global Services' ability to sell consulting services around packages such as the Tivoli management software.

The initial take from industry observers is that this deal is Carly 2.0.

"It's somewhat amusing because we've seen this play before. I think this is sort of further evidence that HP really does see value at scale basically, at size," said Haff. "One of the things we've seen very clearly over the last couple years that is Carly really had the right idea, she just couldn't execute on it. She wasn't wrong for saying HP needed to be bigger, effectively," said Haff. "If (the merger) does go through we're going to end up with an HP that looks a lot like Carly wanted it to look."

The task of integrating two large companies and their vastly different technology and corporate cultures is an unenviable one. The upside is that HP would have more to offer to companies with large IT infrastructure needs, and EDS would be able to broaden its reach. But is bigger necessarily better?

"Not all customers need a battleship to deliver their IT services," Forrester analyst Paul Roehrig points out. "Some customers are looking for smaller, more flexible, transparent service providers. In a sense, I'm wondering if HP is trading off success in the smaller deal for larger deals."

Plus, he added, in the past, "Hurd has said they've not been going after (large deals). The question is, is this a strategic inconsistency or all part of a master plan?"

CNET News.com's Jim Kerstetter contributed to this story.

Original article: HP in talks to buy EDS from CNET News.com