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BL: Hewlett-Packard Agrees to Acquire Electronic Data (Update1)

By Connie Guglielmo

May 13 (Bloomberg) -- Hewlett-Packard Co., the world's biggest personal-computer maker, agreed to buy Electronic Data Systems Corp. for $13.9 billion to more than double its sales from computer services. The company raised its full-year profit and sales forecasts for the year.

Hewlett-Packard will pay $25 a share, or 33 percent more than Electronic Data's closing price on May 9, before the companies disclosed they were in talks. The acquisition will start adding to earnings, excluding some costs, as of fiscal 2009, Hewlett-Packard said today in a statement.

The purchase is Hewlett-Packard's largest since the $18.9 billion takeover of Compaq Computer Corp., led by Chief Executive Officer Mark Hurd's predecessor, Carly Fiorina. Combining with Electronic Data, founded by H. Ross Perot in 1962 with $1,000, would help Hurd more than double revenue from services as PC shipment growth slows worldwide.

This is ``a big jump start to H-P's outsourcing business,'' Crawford Del Prete, an analyst with IDC in Framingham, Massachusetts, said in an interview on Bloomberg Television today. Hurd can cut ``a significant amount of cost out of EDS'' by reducing jobs and combining data centers, he said.

The company said today that second-quarter profit probably amounted to 87 cents a share, excluding some costs, beating the average 84-cent estimate of analysts surveyed by Bloomberg. Sales advanced to $28.3 billion, also topping projections. The company said sales will amount to at least $114.2 billion, compared with at least $113.5 billion.

Hewlett-Packard Drops

The transaction should close in the second half of 2008, the companies said today in a statement. Hewlett-Packard stock fell 2.6 percent to $45.61 in trading before exchanges opened after closing at $46.83 yesterday on the New York Stock Exchange. Electronic Data, based in Plano, Texas, rose 8 cents to $24.13 after advancing 28 percent yesterday in regular trading.

``The reaction may be a bit negative because EDS has been struggling for a number of years,'' said Chuck Jones, who helps oversee $17 billion in assets, including Hewlett-Packard shares, at Atlantic Trust Private Wealth Management in San Francisco. ``You've got to feel comfortable that he's thought this out well enough to do it. I believe in Mark Hurd.''

The acquisition will more than double Hewlett-Packard's annual sales in its services unit to almost $40 billion, making it as large a business as PCs. Researcher IDC predicts that PC shipment growth probably will slow to 13 percent worldwide in 2008 from 15 percent last year, dragged down by waning demand in the U.S., the largest market for the machines.

Hewlett-Packard gets about 15 percent of its revenue from services. The company competes against IBM in storage devices, software and servers -- computers used to run corporate networks and Web sites. IBM, based in Armonk, New York, got about $54.1 billion from services last year, or more than half its sales.

Sales growth at Electronic Data slowed to 4 percent last year, half the pace of the previous year. Sixty-year-old Ronald Rittenmeyer, who became CEO in September, relied on overseas expansion to boost contract signings 66 percent to $5.6 billion last quarter. Still, a slowing U.S. economy forced some clients to curb spending on small projects, especially in the manufacturing and consumer-products industries, he said last month.

(The companies will hold two conference calls today at 8 a.m. and 9 a.m. New York time. To listen in, go to http://www.hp.com.)

To contact the reporter on this story: Connie Guglielmo in San Francisco at [e-mail]
Last Updated: May 13, 2008 08:00 EDT