HP in talks to buy EDS to compete with IBM

NEW YORK/SAN FRANCISCO (Reuters) - Hewlett-Packard Co (HPQ.N: Quote, Profile, Research, Stock Buzz) is in talks to buy technology outsourcing company Electronic Data Systems Corp EDS.N for $12 billion to $13 billion in a deal which would vault it to a close second to IBM in technology services.

The acquisition would be HP's biggest since its $19 billion acquisition of Compaq in 2002. Shares of EDS rose nearly 28 percent, taking its market value to about $12 billion.

HP shares fell nearly 5 percent amid some skepticism that slow-growing EDS, still considered in turnaround mode, would provide more than a one-time boost, and might not be worth a premium of as much as 37 percent.

A source briefed on the matter confirmed the talks to Reuters and said the plan was to announce a deal by the close of Tuesday. The Wall Street Journal first reported the discussions, and later HP and EDS both said they were in talks about a business combination but gave no details.

"While Hewlett-Packard has over time built up its own outsourcing practice, this clearly is a move by Mark Hurd to challenge IBM in the services area," said David Garrity, director of research at Dinosaur Securities, referring to HP's chief executive.

A bigger HP could compete better against International Business Machines Corp (IBM.N: Quote, Profile, Research, Stock Buzz) in going after large clients and help it keep costs in line, analysts said. If HP completes the acquisition, it would be by far the largest under CEO Hurd.

"It would put Hewlett-Packard in the sweet spot of an IT spending trend. It would definitely improve their position against IBM," said CRT Capital Group analyst Ashok Kumar.

SKEPTICISM ABOUT TARGET

HP has long considered an acquisition to beef up its tech services business, a sector that offers relatively stable income and high margins even in an economic downturn.