HP buys EDS for $13.9 billion

The terms of the transaction have been unanimously approved by the HP and EDS boards of directors.

The transaction is expected to close in the second half of calendar year 2008 and to more than double HP's services revenue, which amounted to $16.6 billion in fiscal 2007. The companies' collective services businesses, as of the end of each company's 2007 fiscal year, had annual revenues of more than $38 billion and 210,000 employees, doing business in more than 80 countries.

HP intends to establish a new business group, to be branded EDS - an HP company, which will be headquartered at EDS's existing executive offices in Plano, Texas. HP plans that EDS will continue to be led after the deal closes by EDS Chairman, President and Chief Executive Officer Ronald A. Rittenmeyer, who will join HP's executive council and report to Mark Hurd, HP's chairman and chief executive officer.

The two global giants will clash in a hot growth area in which machines, software, storage and support are increasingly mixed in one-stop offerings clubbed as IT infrastructure in the global IT services game.

The HP-EDS deal announced on Tuesday signals a stronger global competitor for the country’s IT industry led by firms like Tata Consultancy Services and Infosys, and also suggests sustained global demand for India’s software engineers and network managers in the job scene as the world gears for large grids of network computers and complex applications.

Besides IBM, Accenture, EDS and Perot Systems have been among major IT recruiters in India, which is a strategic battlefield.

Shares of MphasiS, which comes after TCS, Infosys, Wipro and Satyam in size, surged about 11 per cent as news of the acquisition talks came overnight from the US, and brought back interest in software companies worried by a strong rupee and a US slowdown over the past year

HP, which is better known for its computers and printers and a difficult digestion of once-shining Compaq computer brand,  said it will pay $13.9 billion (Rs 55, 600 crore) for EDS, which has a captive operation in addition to MphasiS.

“Both HP and EDS see India as a key area in their overall strategy and are looking to strengthen their capabilities that will help them to bring more work to India,” says Rajesh Jain, Head, Advisory services, KPMG.

HP has been struggling to grow its services business, which is currently dominated by India and where other global majors have a significant presence. IBM has about 40,000 employees and Accenture CEO Bill Green recently said that the company plans to hire 50,000 employees in India by end of 2009.

HP will pay $25 a share, a 32.5 per cent premium to EDS’s closing price of $18.86 on Monday.

A deal would make H-P the world's second-largest provider of technology services after International Business Machines (IBM) Corp. EDS has 137,000 employees who maintain and support IT systems. The combined company would be able to trim overhead costs, while allowing HP to sell more servers and workstations to EDS’ consulting clients. That’s largely been the model for IBM.