Hewlett-Packard Acquires E.D.S.
SAN FRANCISCO — The Hewlett-Packard Company, the personal computer and printer maker, said Tuesday that it would acquire the Electronic Data Systems Corporation, the operator of corporate computer systems, for $13.9 billion.
The price of $25 a share represents a 32.5 percent premium to Electronic Data Systems’ closing price of $18.86 on Friday.
The transaction, which is expected to close in the second half of this year, has been approved by the boards of both companies. H.P. said in a statement Tuesday that it intended to make E.D.S. a separate business group that would remain in Plano, Tex.
The deal will make H.P. the second-largest player in the industry behind I.B.M., and is H.P.’s largest acquisition since it acquired Compaq for $20 billion six years ago.
The chief executive of Hewlett-Packard, Mark V. Hurd, said Tuesday in an interview that H.P. needed E.D.S. because “this is an asset that we can extend our capabilities.”
Mr. Hurd has been trying to increase the size and strength of the company’s business information technology services division, an industry that he said is growing 6.7 percent a year. “We felt having their competency is important,” he said.
The services businesses is attractive to I.B.M. and H.P. because it is a fast-growing global business valued at about $748 billion by Gartner, a market information firm. Hewlett-Packard has lagged behind I.B.M., the industry’s leader with around $54 billion in annual revenue. It is followed by E.D.S., which has about $22 billion in revenue.
Hewlett-Packard, meanwhile, had around $16.6 billion in revenue from services in 2007, and the acquisition, H.P. said on Tuesday, was expected to more than double that amount. Size matters in this business, because a larger company can have people in place across the globe to provide the services.
“It’s a very significant combination,” said Ben Pring, a research vice president in the IT Practices Group at Gartner. But “people who are skeptical of big integrations will have a field day around this,” he said. “It’s putting together two large businesses with two different heritages. It’s going to be a big culture clash.”
Mr. Hurd did not dismiss concerns that merging E.D.S. into H.P. would be difficult. “With anything of scale, it always comes down to execution,” he said.
“It comes down to getting things done.” The chief executive of E.D.S., Ronald A. Rittenmeyer, said Tuesday in an interview. “I don’t think the cultural differences are that significant.”
Mr. Rittenmeyer said both companies shared the same work ethic and entrepreneurial spirit. “It is not without its challenges,” he said. “H.P. has a great playbook in doing this in the past.”
Hewlett-Packard, based in Palo Alto, Calif., has not been averse to making acquisitions in recent years. Mr. Hurd has been vigorously adding software and services companies to take on I.B.M. in a ruthlessly competitive business of managing data centers and the data processing of large corporations.
The business has long been rough — with competitors eking out low profit margins — but it has become particularly challenging as companies award contracts to outsource work to overseas companies, notably in India, that pay lower wages.
Shares of E.D.S. closed at $24.13, up 28 percent from Friday’s close. Shares were up another 1.5 percent Tuesday, while H.P. shares were down 5.8 percent.
E.D.S. has a storied past. Founded in 1962 by H. Ross Perot, it pioneered the outsourcing of data management as well as the management of entire data centers. In 1984, he sold the company to General Motors, but it was a rocky relationship and he left the company two years later. G.M. spun off E.D.S. in 1996.
E.D.S., based in Plano, Tex., is comfortable with acquiring and integrating new operations because that is its business. Hewlett-Packard successfully integrated Compaq and has reorganized its core businesses to cut costs and provide cash for growing businesses. Business services had been a laggard division for H.P., but Ann M. Livermore, the executive vice president responsible for what the company calls its Technology Solutions Group, has made it profitable and made its growth rate match the rest of the company.
H.P. has acquired a string of enterprise software companies in recent years, including Mercury Interactive, Opsware and Neoware. (Several years ago, H.P. considered purchasing P.W.C., a major consulting firm, only to lose it to I.B.M.)
But the size of the proposed merger with E.D.S. would pose more daunting challenges. E.D.S. has 140,000 employees to H.P.’s 172,000. About two-thirds of the E.D.S. employees are located in the United States, which means Hewlett-Packard would be buying a relatively expensive work force compared to the fast-growing lower-cost competition based overseas, said A. M. Sacconaghi Jr., an industry analyst with Sanford C. Bernstein & Company.
Mr. Sacconaghi said that while he shared some of the skepticism of the deal, he thought H.P. could justify the acquisition on the basis that E.D.S. had fallen out of favor, and that this was the right time to make a deal.
In the last year, the stock has fallen steadily from around $28.
“This is bargain-hunting,” Mr. Sacconaghi said. “This is H.P. saying, ‘We see a cheap asset.’ “
Chris Whitmore, an analyst with Deutsche Bank, noted that E.D.S. had grown marginally, to around $22 billion in annual revenue, from $19.8 billion in 2003. And E.D.S.’s operating margins have been around 6 percent, about half of that of Hewlett-Packard; neither of those figures is particularly impressive, though the operating profits in the services businesses tend to be modest. I.B.M.’s service’s margins are a little higher than 10 percent, analysts said.
Mr. Whitmore said that he was surprised by the prospect of a deal because such a major integration can be so distracting, particularly because, he said, H.P. has done such a fine job of re-organizing its business in the last few years.