HP to buy EDS for $12.6 billion in challenge to IBM

By Franklin Paul

NEW YORK (Reuters) - Hewlett-Packard (HPQ.N: Quote, Profile, Research) plans to buy technology outsourcing company Electronic Data Systems (EDS.N: Quote, Profile, Research) to better compete against IBM (IBM.N: Quote, Profile, Research), but Wall Street questioned whether the $12.6 billion (6.5 billion pound) deal for a slow-growing company was overpriced.

HP shares fell 5.28 percent after the deal was announced on Tuesday, on top of a 5 percent drop on Monday in anticipation of the news. The declines have wiped about $12 billion off HP's market value, taking it to $109 billion.

Owning EDS, one of the pioneers of the outsourcing of managed computer services, would vault HP to second place in the global technology services industry, behind International Business Machines. Analysts said the merged company would be better-equipped to go after large clients and cap costs.

Neither EDS nor HP, however, are strong in the high-end consulting business that is a strong suit of IBM, they said.

Brent Bracelin, an analyst at Pacific Crest Securities, said EDS gets half of its revenue from government and financial services customers, which are not high-growth clients.

"What investors are worried about now is what happens over the next six months," he said. "I think there are still some concerns around extracting value out of the deal."

The acquisition would be HP's biggest since its $19 billion purchase of Compaq in 2002 and the most ambitious under Chief Executive Mark Hurd.

It values EDS at $25 per share, a 33 percent premium to its closing price on Friday. Including debt, the deal's enterprise value was $13.9 billion, the companies said.