HP buys Electronic Data Systems

16 May 2008

Hewlett-Packard Co has bought technology outsourcing major Electronic Data Systems Corp (EDS) for $12.6 billion. The companies said the deal values EDS at $25 per share, a 33 percent premium. The acquisition would be HP's biggest since its $19 billion acquisition of Compaq in 2002. Electronic Data Systems Corp has a market value of around $12 billion.

Hewlett-Packard's plan is to challenge IBM's monopoly role in services outsourcing area by taking over EDS. HP has built up its own outsourcing practice for the last few years. It is believe that HP could compete better against International Business Machines Corp in going after large clients and controlling increasing cost. HP has long been considering a major acquisition to beef up its tech services business. Services sector is considered as a major sector that offers relatively stable income and high margins even in an economic downturn. According to market research firm Gartner computer services revenue stands at 478 billion dollar as of 2007.

IBM holds the market leadership with a share of over 7.2 percent. Electric Data System is in the second slot with three percent. Currently HP is in the fifth position with a market share of mere 2.2 percent. Together HP and EDS would have roughly $39.4 billion in services revenue, compared with IBM's $54.1 billion last year. EDS would help HP to bring in strong base in infrastructure outsourcing. HP's move would be to synergize its strengths and reduce weakness by joining hands together. EDS has more than 135,000 employees and has been struggling to compete with industry leaders IBM and Accenture. With many small Indian companies have emerged as competitors in the service outsourcing sector, EDS is compelled to forge tie up with a strong partner.

EDS has pioneered the concept of running data centers and providing other high-tech help for large companies and government agencies. The demand for data management and technology consulting services has been steadily growing during the past two decades with the aggressive automation works of corporate America. The rise of the Internet has also prompted more businesses to hire contractors to help run their computer software and hardware.