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H-P will buy EDS for $12.6 billion

Hewlett-Packard Co. will buy Plano-based Electronic Data Systems Corp. for $12.6 billion in a deal that will create the second largest technology services provider behind IBM but also lead to job cuts.

Under the terms announced early Tuesday, Palo Alto-based HP will pay $25 per share in cash for EDS, which H. Ross Perot founded in 1962 to create the business of running computer systems and providing other high-tech help for large companies and government agencies.

The industry today is dominated by IBM Corp., which generated $54 billion in revenue from technology services last year. HP’s technology services revenue will more than double to more than $38 billion with the addition of EDS, which had $22 billion in revenue last year.

The deal is expected to close during the second half of last year and begin to boost HP’s profit in its fiscal year ending in October 2010, the company told financial analysts and reporters.

Once the marriage is completed, HP estimates it will have about a 7 percent share of the technology service market compared with IBM’s 10 percent share. The deal will enable HP to leapfrog Fujitsu and Accenture in the niche.

To make sure the EDS takeover pays off, HP indicated it will make significant layoffs as it eliminates overlapping jobs and other expenses. In Tuesday’s conference calls with media and analysts, HP Chief Executive Mark Hurd and EDS CEO Ronald Rittenmeyer declined to estimate how many workers might lose their jobs.

EDS has about 7,200 North Texas workers, including about 800 in Tarrant County who were previously with Sabre Holdings’ airline computer-systems business, which EDS acquired in 2001.

“There are obviously going to be some changes,” said Rittenmeyer, who will run the combined technology services unit and report directly to Hurd.

The combined services business would have 210,000 employees and operations in more than 80 countries. It will retain the EDS brand and EDS’ Plano, Texas headquarters.

Hurd hailed the EDS deal as “compelling.”

Peter Bendor-Samuel, chief executive of The Everest Group in Dallas, a researcher and consultant to the data-processing industry, said the deal probably has more pluses than minuses. It will instantly make HP a strong No. 2 competitor to IBM, the clear leader in technology outsourcing, while giving EDS access to additional customers.

Job cuts are most likely to hit administrative workers in departments where the companies have overlapping duties, such as finance and human resources, Bendor-Samuel said.

HP has been trying to expand its technology-consulting business for years. In 2000 it attempted to buy PricewaterhouseCoopers’ consulting division, but IBM wound up with the operation instead.

EDS practically invented the data-processing outsourcing industry in 1962. But after decades of expansion, its growth slowed in the late 1990s. In 1998, the company hired former telecommunications executive Richard Brown, who implemented a number of growth initiatives, cost-cutting moves and a wide-ranging corporate reorganization.

By 2002, the company was forced to slash its earnings outlook as a huge Navy contract Brown had won with an aggressive bid lost hundreds of millions of dollars. Brown was fired in 2003 and his replacement, Michael H. Jordan, slowly stabilized EDS’ operations.

EDS earned $716 million on $22.1 billion in revenue last year.

Bendor-Samuel said that EDS is solidly profitable, is past its Navy contract problems and would give HP an entry to additional government contracts. HP last year had about $500 million in prime federal contracts, compared with $2.5 billion for EDS, enough to put it among the top 10 government technology contractors.

He said the real challenge might be integrating the Silicon Valley culture of HP with a "button-down, formal" environment at EDS. But he said that might be eased because a number of former EDS workers have migrated to HP, including John W. McCain, who left EDS in 2002 after one of Brown’s reorganizations and recently was put in charge of HP’s consulting operations.

Analysts on Tuesday’s conference call repeatedly grilled Hurd on the purchase price, given that EDS’s stock price had fallen by about 30 percent over the past year before news of the deal leaked out late Monday.

Some expressed concern that EDS will become a drag on HP’s revenue growth while others indicated they believed the company would have been better off spending its money buying an assortment of smaller software makers.

Hurd brushed aside those misgivings, predicting HP and EDS will be able to create the “best services company on planet Earth, delighting customers in everything we do.”

HP said the EDS acquisition had an “enterprise value” of $13.9 billion and didn’t immediately explain how what that figure included. But based on 502.6 million EDS shares outstanding as of April 25, the acquisition would be worth $12.6 billion.

Either way, it will mark HP’s largest purchase since it bought Compaq Computer Corp. for $19 billion six years ago. That acquisition paved the way for HP to supplant Dell Inc. as the world’s largest PC maker.

The agreed price of $25 was nearly a 25 percent premium to Friday’s closing price for EDS. The companies said Monday they were in talks. In morning trading Tuesday, EDS shares rose 35 cents to $24.43 while HP lost $2.83, or 6 percent, to $44.

Buying EDS gives more tools to challenge IBM in the lucrative technology services field. HP already has replaced IBM as the world’s largest technology company, based on revenue.

The demand for data management and technology consulting services has steadily grown during the past two decades as the automation of corporate America and the rise of the Internet prompted more businesses to hire contractors to help run their computer software and hardware.

HP has been on a roll since it hired Hurd as chief executive three years ago. Propelled by earnings growth that has consistently exceeded analyst expectations, the company’s stock price has more than doubled since Hurd’s arrival.

The trend continued in HP’s latest quarter ended in May. In preliminary report released Tuesday, HP said it earned 80 cents per share on revenue of $28.3 billion in the period, up from 65 cents per share on revenue of $25.5 billion at the same time last year.

If not for one-time charges for previous acquisitions, HP said it would have made 87 cents per share — three cents above the average estimate among analysts polled by Thomson Financial.

EDS has been linked with possible deals previously, including a reported interest by Deutsche Telekom late last year and Dell before that. No suitors ever confirmed reports that they were talking.

Former IBM salesman H. Ross Perot started EDS in 1962 to help run other companies’ computer systems — a specialty generally known as information-technology or IT services.

Perot sold EDS to General Motors Corp. for $2.5 billion in 1984 and eventually became so disillusioned with how that deal worked out that he sold his remaining EDS shares to the automaker so he could start a new rival service bearing his name.

An outspoken billionaire, Perot became even more famous for running for U.S. president in 1992 and 1996. GM spun off EDS as an independent company in 1996 and remained its largest customer.

  • Staff writer Jim Fuquay contributed to this report.
  • FROM STARTUP TO TAKEOVER TARGET

    June 27, 1962: Computer-equipment salesman H. Ross Perot uses $1,000 to found Electronic Data Systems with the idea of providing data-processing work for companies. Medicare processing and airline tickets become major sources of business.

    June 27, 1984: General Motors agrees to acquire EDS for $2.5 billion. Perot joins GM’s board and becomes a vocal critic of the company.

    1985: Revenues nearly triple to $3.4 billion; nearly 16,000 new employees either hired or transferred into EDS.

    Aug. 7, 1995: GM announces plan to spin off EDS in 1996.

    March 15, 2001: Buys airline computer-systems business from Sabre Holdings, moving 4,200 Sabre employees to EDS.

    March 20, 2003: Richard Brown is replaced by Michael H. Jordan, former head of CBS Corp., who quickly reverses some of Brown’s strategic moves

    2006: Earnings grow, but job cuts continue

    Sept. 1, 2007: Ronald Rittenmeyer, 60, named CEO.

    May 13, 2008: Hewlett-Packard Co. agrees to buy EDS for $12.6 billion

    Source: Star-Telegram archives

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